Buy to let Mortgage Volume Data Probably Nonsense – But Being used to Drive Policy

A few weeks ago, the government announced it was weighing up giving the Bank of England more powers to intervene in buy to let lending to cap loans.

Buy to let Mortgage Volume Data Probably Nonsense – But Being used to Drive Policy

This is because they are concerned that large numbers of landlords could sell out at the same time if interest rates rise, thus unsettling the precious housing market (and a cynic might say, their friends in the big house building firms).

But there is not a scintilla of evidence that this happened before in previous periods when interest rates rose or credit crunches hit. Back in 2002-3 and in 2007-8, lots of the hapless landlords who had bought new build flats back in the period from 1997 to 2002, (in what turned out to be oversupplied areas like Leeds and Manchester), faced huge losses when the extent of the over-supply hit home. We know of some who are still sitting on losses of over 15% today compared to year 2000 prices. Sure, some had to sell, but it did not destabilise the wider housing market at all. And the flats still sit there today.

The properties may never make much money for the owners, (as oversupply is still a problem in many areas), but they do provide living accommodation for many tenants. As lots of the finance to build them came from landlords, you could say that without landlord investors, they would never have been built at all. (Jeremy Corbyn and co please take note)!

Landlords Not Stretched – So Why Would They Sell?

All the evidence points to arrears rates being lower on buy to let lending than on residential mortgages, which implies that landlords are clearly not too stretched financially. With a cushion of at least 25% equity (compared to 10% on residential loans) and a strong rental market you would not expect landlords to be too stretched anyway.

So, is there a secret government agenda at work here? We think possibly so. There is a concern amongst some that buy to let lending is over-dominant and “crowding out” first time buyers. This is a view that Jeremy Corbyn would probably agree with as well as some Conservatives. (As I mentioned above, this conveniently ignores all the new build stock that was built off the back of landlords’ cash). But is that true? Are landlords really crowding first time buyers out to any great extent?

Buy to Let Mortgage Volumes Data is Flawed

We don’t think there is much crowding out because we think the data on buy to let mortgage volumes is flawed. I will explain. ….. We think lots of the so called “buy to let loans” are actually being taken out by buyers to live in themselves (often with the connivance of many mortgage brokers).

This is how many home buyers get around the ludicrously over-the-top checks on residential mortgages that were put in place following the Mortgage Market Review. They simply get a buy to let loan, thus neatly avoiding all the income and expenditure checks that apply on residential mortgages. OK, the deposit requirements are higher, but there is the Bank of Mum and Dad Limited to help out with the deposit cash.  The kids then live in the property, using the Royal Mail’s postal redirection service to ensure they don’t get caught out (and hope they never get a big insurance claim and an adjuster looking to repudiate a claim following a total loss). We think this practice is quite widespread and maybe rife.

Thus, we think the reported volume of “buy to let loans” is significantly more than the number that are actually really being used to let a property with. We also think the lenders’ checks to stop this happening are weak in practice and the volumes of buy to let loans overstates the true number being used for letting. Of course, we cannot prove it.

The real craziness is that this duff data is being used to drive government policy. And there maybe another twist too. Perhaps the government and lenders know what is happening and understand that lots of these so called buy to let loans are really being lived in by residential owners – and it is the fear that it is these non-landlords won’t be able to keep up with mortgage repayments.  Instead – and conveniently – it is landlords who are getting the blame.  

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2 comments

  • Mark Carney was uttering dire warnings of impeding rate increases when it was patently obvious that that was not going to happen with near to zero inflation (official) and an already resurgent pound. BTL had clearly taken off before the pension reforms which added fuel to the fire and it is undisputable that many landlords have enterd the sector blindly as they have long done. we have been buying top notch nine year old city centre apartments often from the original owner wh had been off-plan flipped and sometimes twice. You can more or less work out what they paid from their sticking price i.e. enough, just, to clear the mortgage. Entrants like ourselves should be in a differnt world. No initial LTV higher than 75%, no initial yield less than 7% strong cap growth and rent potential. By focussing on quality and where supply cannot be increased, there ain’t no more space, we saw cap values as only going one way compared to the mass building within 1/3rd mile, some people just will not go there. And so it’s proven with Lto revised values of 62% and market rents up to 50% more than agents had been underletting for we are not going tobe selling. The Finance Act changes are not only illconsidered but will probably be challenged in Court due to the collateral and unperceived side effects on some. We won’t be selling but will a) take more management under our control and invoice that efficiently b) look to increase rents over four years to make up the cashflow loss i.e. higher gross but lower net yield and only c) run the gearing down which were going to do anyway but will now be slower and thus the FA is counterproductive in that respect. The real losers will be UK domestic renters (not everyone wants to buy even if they can afford it) who get outgunned by foreign students, uk buyer (see next sentence), smaller landlords without a proactive role in their investment. The real winners ARE ALREADY foreign based or simply cash private BTL purchasers unaffected by the FA (and who are bidding up prices) and overseas developer/manage/let groups. With these two latter groups Osbourne will get some withholding tax but the corporation tax leakage will be significant.

    • Good comment – re the effect of Overseas investors, see also the investigation by Private Eye on that, in this weekends’ issue which I’m delighted to see the London Evening Standard put on their front page yesterday.

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