Just a few weeks ago we covered the subject of the buy to let market and the ever-growing interest from the Bank of England’s regulatory department. There are serious concerns that an increase in UK base rates, whenever this may be, could prompt a wave of selling by buy to let investors which may compromise the UK property market and economy.
When you bear a mind that buy to let investment has almost doubled over the last decade (now around 14.5% of new mortgage lending) this is a very powerful group of investors.
Damning report due
The regulatory branch of the Bank of England will release a report on Tuesday which is expected to highlight significant issues as and when UK interest rates rise. Ongoing concerns over the eventual rise in interest rates could prompt many buy to let investors to sell up and cash in at the first signs of change. As a consequence this subject is likely to dictate short to medium term policy in relation to this area of the market. Even though George Osborne recently announced plans for a 3% increase in stamp duty impacting those with second homes and buy to let investors it seems that nothing can quench the thirst that buy to let investors have for UK property.
What can the authorities actually do?
Whether or not they would be well received, the Bank of England still has a number of pulleys and levers at its disposable. Some of the more blunt instruments it could use to reduce interest in the buy to let market include increasing deposits against buy to let loans, limiting the number of buy to let agreements per mortgage provider as well as tightening terms of the maximum loan to property value ratio. These are fairly blunt and fairly fast acting instruments and they may well be required to take some of the heat out of the UK property market in the medium term.
Are interest rates the key?
While it would be wrong to suggest that low interest rates in the UK have spawned the emergence of the buy to let market, they have certainly encouraged investors to look at this particular area. Historically low interest rates together with relatively low inflation have increased the real returns on buy to let investments and drawn new entrants to the market like a magnet. The opportunity of creating a fairly steady long-term rental income stream together with the potential for long-term capital appreciation has been too good an opportunity for many to pass up.
Is this just a warning?
Over the last few months the UK government has attacked the UK property market and in particular those making a significant return on their buy to let investments. This gradual increase in base costs for buy to let investors has had an impact upon sentiment but the forthcoming 3% stamp duty surcharge created something of a stampede by buy to let investors ahead of its introduction. This week’s report from the Bank of England’s regulatory arm will alarm many, will probably paint a worst-case scenario but it will give the authorities a reason to be even tougher on UK property investors.
Whether this is all just smoke and mirrors remains to be seen but there is no doubt record low interest rates and relatively low inflation are feeding the monster which is the UK buy to let sector.