Bank of England concern over buy-to-let mortgages

RISKS to UK economic stability have risen amid a surge in buy-to-let mortgages and the turmoil in China, the Bank of England has said.

The Chancellor in China this week

The Bank’s Financial Policy Committee (FPC) said the outlook “remains challenging” and that while the financial system was becoming more resilient “downside risks have risen”.

It warned that buy-to-let landlords, typically funded through interest-only loans, could be “disproportionately vulnerable” to large falls in house prices and could amplify any property downturn.

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Officials stopped short of taking immediate action to rein in the sector, but said they would monitor it closely.

The outstanding stock of buy-to-let mortgage lending has risen by 40 per cent since 2008, 20 times faster than owner-occupier loans.

In the same period, the buy-to-let share of the whole market has risen from 12 per cent to 16 per cent.

This concerns the Bank partly because a continued increase in the market risks pushing up house prices further, meaning more borrowing and greater household debt.

But if landlords see their loan repayments starting to exceed their rental income, many would respond by selling their property - potentially accelerating a downturn in the property market.

The Bank also said intensified competition among banks might loosen the conditions under which they would prepare to lend to landlords.

It said: “The committee considered the rapid growth of buy-to-let mortgage lending.

“It does not consider action to be warranted at present, but will monitor underwriting standards and other conditions closely.”

The FPC said earlier this year that it was looking at ways to limit threats posed by the burgeoning buy-to-let market.

Powers allowing it to curb risky loans do not apply to this sector. The Treasury has said it would consult on extending them to it.

Meanwhile, risks posed by volatility in China and other emerging market economies were also highlighted by the Bank’s latest statement.

“Fears of a slowdown in the world’s second biggest economy have convulsed markets in recent months.

Emerging economies have seen $90 billion (£59 billion) pulled out over the last year as their performances stutter - and with the era of cheap credit for US investors coming to an end, as an interest rate rise nears.

Wobbles in these countries “affect UK financial stability through the direct exposure of UK banks” and indirectly if the shifts they cause in the global economy strain world markets, the Bank said.

Central bankers worry that events like a rise in interest rates could trigger disorderly selling - a “taper tantrum” - in bond markets.

That happened when the United States began to phase out its programme of bond buying late in 2013.

The FPC noted recent instances of volatile trading and said that the importance of automated systems that could amplify price moves “may be growing in importance”.

It said it would study this further and report back in December.

Alongside its report, it published a letter from Bank governor Mark Carney to Chancellor George Osborne giving its annual assessment of the Help to Buy mortgage guarantee scheme.

Mr Carney said the way the scheme was run remained appropriate and “does not pose material risks to financial stability”.

A Treasury spokesman said: “It is important that Help to Buy can safely go on helping more people achieve the aspiration of buying their own home.

“That is why the Government asked the Financial Policy Committee’s to carry out an annual assessment of the impact of Help to Buy.

“The committee plays a crucial role in protecting our hard-won economic security by routinely assessing the housing market.”