Property News

It's an old truism of our national life that a week is a long time in politics. Since the referendum, however, it seems that ten minutes is a rather long time, too. Resignations, leadership contests, the Chilcot Report being finally published: it's all been happening. In the meantime, businesses have been trying to come to terms with the historic Brexit vote.

It isn't entirely surprising that the markets have been a little wobbly and that the pound has taken a pounding against other major currencies. And the property sector hasn't been immune to the turbulence. There have already been much-publicised reports of institutional and other investors withdrawing from property funds and house building companies.

Investment in commercial property ventures has also taken something of a hit in recent weeks. The impact of Brexit on house prices is still being debated, with housing experts differing in the degree to which our leaving the EU will make any difference to the cost of residential property and whether any downturn will be of long duration or rather a temporary blip.

It's now the turn of buy-to-let to come under the spotlight, with Mark Carney, Governor of the Bank of England (BoE), signalling that he and his organisation are watching the sector very closely. In this piece, we look at the latest BoE developments and at other buy-to-let news.

Why the BoE interest?

The BoE is charged by statute with the task of monitoring and, to the extent possible, safeguarding the United Kingdom's financial stability. This involves identifying patterns in the banking sector and wider economy which present systemic risk. It has attracted a certain amount of criticism during and after the Brexit vote because it is supposed to be politically neutral and some perceived its warnings about the possible effects of Brexit as being an unfair and unwarranted intervention in the democratic process.

In fact, given its remit, it's hard to see how the BoE could have behaved differently. It's job is to warn the country of risks to the financial system and when it has failed in this regard, such as before the financial crisis of 2007-2008, the consequences have been little short of cataclysmic.

In keeping with its role, the BoE has, since the Brexit vote, made a number of statements about how it proposes to shore up the economy. For example, it has made funds available for so-called "quantitative easing" and announced that it is relaxing banks' capital adequacy requirements. The latter means that the banks are now allowed to free up some of the resources that they would normally be required to maintain as "rainy day" funds and lend them to businesses and individuals to help keep the economy moving.

It has also identified areas that it considers to be especially troubling. As indicated above, it is worried about the turmoil affecting property and construction businesses since the referendum. As an adjunct to this, it is concerned about buy-to-let.

In previous articles, we have discussed the fact that the BoE was taking a hard look at whether buy-to-let represented a possible "bubble" which could cause devastation if it burst. There were suggestions that it should be given greater control over the supervision of this sector and it has issued a consultation on various measures that it believes could safeguard the sector.

One of its central concerns has been that, should interest rates be increased, landlords would be unable to afford the higher mortgage payments. Accordingly, numerous banks reacted by significantly tightening their lending criteria for investors operating in the buy-to-let sector.

The BoE is now concerned that the buy-to-let sector may follow the example of other elements of the property market and sell up en masse. In its latest financial stability report, the BoE warned that "..macroprudential risks centre on the possibility that buy-to-let investors could behave procyclically, amplifying cycles in the housing market as a whole." Translated from Regulatorspeak, this means that investors are already withdrawing from house building firms and property funds.

If buy-to-let lenders also conclude that it's time to cash in on their investments, house prices could fall off the figurative cliff. And banks with exposure to this sector could find themselves in seriously deep water. For this reason, Mark Carney said that the BoE would be looking closely at movements in the buy-to-let sector and would stand ready to act.

Landlord reactions

Landlords, of course, are concerned that this will result in increased regulation of the sector, which, to date, has enjoyed a relatively light supervisory touch. They are already dismayed by the Chancellor's new tax regime for investments in the rental sector, which has been described by some market participants as an "assault" or a "war" on landlords. Add to this the tightened controls on lending and landlords will be hoping that yet another barrier isn't poised to be erected to deter them from investing in housing.

Investors have, thus far, taken the battle to the Government and have shown no inclination to give up their challenge to what they view as an inequitable attack on their interests. Fighting a new layer of regulation against the backdrop of declining house prices is certainly a skirmish they will hope to avoid.

The press has recently carried stories of various cities becoming landlord "no go zones" because, coupled with the tax changes, the tighter lending rules being applied by certain mortgage lenders are rendering residential property in some areas simply too expensive to be a worthwhile investment.

Landlords are frankly looking for a break, especially when so many of them carry the conviction that the measures aimed at making the housing market more accessible to first time buyers are doomed to failure since the country's real housing problem is the shortage of houses and flats. In other words, there will be pain for landlords and no gain elsewhere.

At http://www.nethouseprices.com, we will be monitoring all the news relating to the buy-to-let sector and will be analysing it in depth to help you make the right decisions for your business. Visit us soon for more information.