One of the features of central banking policy in the credit crunch era is that they have an asymmetric response pattern. They are ready to ease almost at the drop of a hat and at time even plunge us into negative interest-rates and yields. Yet on the other side of the coin they are slow to tighten policy or as we saw in the UK as inflation pushed to above 5% in 2011 sometimes do not tighten at all. In other words they are prone at best to doing too little to late. Even the US Federal Reserve which has begun a tightening cycle is proceeding slowly and is well behind the curve unless you believe that oil and commodity prices will continue to fall.
If we look at the UK the Bank of England has left official interest-rates unchanged for over 7 years now. Its major effort has come via both QE and the Funding for Lending Scheme which helped both banks and the housing sector. I discuss that in more detail below. But I note that for all the hype about it acting it is even behind the government which has announced both Stamp Duty and Income Tax changes. Was not one of the points og having a committee of technocrats that they were supposed to act more quickly and decisively than politicians?
Also if we move to the Financial Planning Committee was it not created for this sort of thing? Is all the expense of this particular Quango merely so it can use the word “vigilant” and then go to lunch. If we omit Governor Carney can anybody name a member of it? I can only because I used to work with Dame Clare Furse. I noted a while back when I retweeted a speech of hers for old times sake that it did not create much of a splash. Next time I decided not to so I could see if anybody else did and as far as I can tell nobody did. The musical reference has to be “The Sound of Silence” by Paul Simon.
Buy To Let Lending in the UK
An example of this has been the boom in UK Buy To Let lending which has help drive house prices out of the reach of first-time buyers in much of the UK. On Thursday the British Bankers Association published the latest figures.
Mortgage borrowing remained buoyant in February. It appears that borrowers are continuing to try to get ahead of the increases in stamp duty for buy-to-let and second home buyers scheduled to come into effect next month.
It was not only borrowing which was buoyant.
There were 20% more approvals for house purchase in February than in the same month of 2015. Reports suggest this is, in part, due to buyto-let and second-home buyers…….
Indeed one can make a case for UK credit standards overall being relatively lax if we look at these numbers too.
Unsecured borrowing by households is growing at around 6% per annum reflecting low interest rates and relatively strong household finances.
The BBA likes to rose-tint things as if household finances are so “strong” why do people need to borrow?
If we look back we see that any attempt to roll back on Buy To Let lending has a problem. You see back in the summer of 2012 the Bank of England panicked over the state of the UK housing market and launched the Funding for Lending Scheme. This depressed mortgage rates by up to 2% according to the Bank of England and I noted at the time that the initial effect was to reduce mortgage rates by around 0.9%. Putting it another way monthly bank lending for house purchase mortgages according to the BBA fell to £4.56 billion in July 2012 whereas this February it was £8.45 billion. The total stock of mortgages has risen from £776 billion to £845 billion over the same period. The latter number underrepresents things in my view as some have taken the opportunity of cheap finance to reduce their mortgage borrowings. We do not get enough detail from these numbers but has ordinary mortgage purchases been replaced by buy to let borrowing?
Putting that into affordability can be done by using the average house purchase mortgage size which was £161,100 in July 2012 but is £180,900 now. Wages however have only increased by some 6% leaving them well short of the change. No wonder first-time buyers need so much official “Help” these days leaving them singing along with the Beatles.
Help me if you can, I’m feeling down
And I do appreciate you being ’round
Help me get my feet back on the ground
Won’t you please, please help me
Actually if you argue that the Funding for Lending Scheme will have taken time to impact then you eyes may alight in the average mortgage of £145,300 in January 2013 given an increase of just under a quarter in a mere 3 years and one month.
Along this road you find that the Bank of England is looking at a Buy To Let lending boom of its own creation. No wonder they have tried their best to “look away now”. They should avoid reading Property Review.
According to new data released by the National Association of Estate Agents, during February, 85% of estate agents saw an increase in the number of buy-to-let investors flooding the market to beat the stamp duty changes on second homes.
Oh and as you peruse the market it is hard to escape the “interest-only” mortgages which we were promised would be persona non grata.
It was only on March 18th that I pointed out how Buy To Let in the UK was providing substantial gains.
Taking into account both rental income and capital growth, the average landlord in England and Wales has seen total returns of 12.7% over the twelve months to February. This is up from 11.7% in the twelve months to January.
At a time of such low interest-rates and yields elsewhere no wonder people are attracted to this as an investment strategy. It was only yesterday we got more details on the amount of lump sum money taken out of UK pensions since the rules were relaxed ( £3 billion) and you have to wonder where it has gone?
The Daily Telegraph seems to keep plugging this area leading it onto all sorts of unexpected places.
Kellie Maloney: ‘Buy-to-let paid for my £100,000 sex change’
There is more than a certain amount of irony in the same Bank of England which pumped up the Buy To Let boom being responsible for puncturing any bubbles! I am sure that many reading this will be also thinking of the phrase “closing the stable door after the horse has bolted”. Indeed the FPC meeting minutes from November were rather clear.
The limited growth in mortgage lending had continued to be driven by the buy-to-let sector. In the year to 2015 Q3, the stock of buy-to-let lending had risen by 10%, compared to 0.4% for owner-occupiers.
This morning has seen the release of the awaited news on action so what do we get? Here is the Prudential Regulatory Authority.
This consultation paper (CP) seeks views on a supervisory statement which sets out the Prudential Regulation Authority’s (PRA’s) proposals regarding its expectations of minimum standards that firms should meet when underwriting buy-to-let mortgage contracts
This will not end fears that the boom will be over and out before anything happens as this is only a consultation paper. Indeed we even have use of the word “soundness” which was a favourite of the head of the civil service in Yes Minister. Should it ever be applied what will we get?
The PRA is therefore proposing that all firms use an affordability test when assessing a buy-to-let mortgage contract……..Even if the interest rate determined above indicates that the borrower’s interest rate will be less than 5.5% during the first 5 years of the buy-to-let mortgage contract, the firm should assume a minimum borrower interest rate of 5.5%.
Oh and those who have wondered about companies doing this will be intrigued by this reference.
The proposals also include clarification regarding application of the small and medium-sized enterprise (SME) supporting factor 1 on buy-to-let mortgages.
Dear Bank of England how much small business lending has been for Buy To Let property?
As to the FPC what will it do?
the FPC remains vigilant to risks in this area.
Perhaps not as vigilant as perusing the tea-trolley or the lunch menu. But along the way we see mention of an issue we have regularly discussed on here but seems to be news to our Quangocrats.
Strong growth of consumer credit, which reached 9% in the year to January 2016, in part reflects increased use of finance secured on the purchase of vehicles.
So it will be “vigilant” “remain alert” and “monitor”. Meanwhile.
The outstanding stock of buy-to-let mortgages has risen by 11.5% in the year to 2015 Q4.