The buy-to-let sector continued to come under pressure last week as the Bank of England’s regulatory arm, the Prudential Regulation Authority, released a consultation paper on the buy-to-let mortgage market. The Bank has expressed concerns about lending standards in the market in the past, and it had been expected to suggest limits on the quantity of such loans that banks could write, or force them to set aside more capital against these mortgages. However, in the end its main recommendation was for stronger affordability tests, including a stricter income verification process.
Lenders will have to look more closely at a borrower’s ability to cover both mortgage payments and associated property costs (including taxes) through either rental income or their own resources. When assessing affordability it now wants banks to assume that rates will go up by 2% from current levels, with a minimum level of 5.5%. Overall, the Bank expects these changes to reduce gross buy-to-let lending by around 10%-20% over the next two to three years.
Nevertheless, more needs to be done, says The Guardian. “Many of the same ingredients are in place” for a repeat of the late 1980s property crash. “Mortgage demand is strong, prices are going up fast and there is a strong belief among buyers that the market can only ever go up.” Preferential mortgage treatment for this sector “encourages buy-to-let when the property market is hot, but means the buy-to-let sector is more sensitive to rising interest rates… there is a bubble inflating out there that needs to be pricked – and the sooner the better”.
Yet while the Bank’s report may have been less radical than expected, it shows that pressure continues to mount on landlords. Chancellor George Osborne has said that he plans to give the Bank more powers over the buy-to-let market later this year. Along with the decision in the recent budget not to pass on the cut in capital-gains tax for property investors, it’s clear that the government views the sector as a key part of the housing crisis. With the 3% stamp duty surcharge on second properties coming into effect this week, buy-to-let sales (which have ballooned ahead of the new tax) look likely to slide.
• Houses across the UK are less affordable than they were last year and when measured relative to incomes are nearing levels not seen since the peak of the last boom, according to a report from Lloyds Bank. And it’s not just all about London any more – much of the southeast of England looks increasingly bubbly too. According to the latest edition of Lloyds Bank’s Affordable Cities Review, the average UK house now costs 6.6 times average gross earnings, compared to 6.2 times last year and 7.2 times in 2008.
The house-price boom seems to be entering a new phase. Having been priced out of both central London and the suburbs, homeowners increasingly seem to be turning to the commuter belt and nearby cities in the search for affordable housing. As a result, these areas are starting to narrow the gap with London. The big question, of course, is whether this process will go into reverse if the London market falls back to sustainable levels.
However, there remains a clear north-south divide. All ten of the least-affordable cities in the UK are in the south of England. Oxford is the priciest, with houses selling for 10.7 times average local earnings. Winchester, London, Cambridge and Bath make up the rest of the top five. Beyond the south, Lichfield and York are the least affordable cities. By contrast, 12 of the most affordable 15 cities are in the north of England – where Bradford and Hereford are the most affordable cities – with the remainder being in Northern Ireland and Scotland.