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Bank of England clamps down on buy-to-let lending Bank of England: EU referendum is risk to economic stability
(about 4 hours later)
The Bank of England is clamping down on buy-to-let mortgage lending as it warns that the outlook for financial stability in the UK has worsened. The Bank of England has warned that the referendum on Britain’s membership of the EU is the biggest immediate domestic threat to financial stability and that market fears about the outcome could push up borrowing costs for households and businesses.
The Bank’s financial policy committee (FPC) views buy-to-let lending as one of the biggest domestic risks to the financial system, although it said the worst short-term risk was the referendum on Britain’s membership of the European Union. The Bank’s financial policy committee, whose job is to monitor risks to the financial system, added the EU referendum, set for 23 June, to its list of risks to stability. It said uncertainty around the vote could increase the price investors demand to invest in UK assets, force down sterling and increase the cost and availability of financing for UK borrowers.
The FPC, whose job is to protect the financial system, set out a range of risks that had increased, including weak emerging market economies, especially China, low profitability for banks and falling asset prices. It set out plans to increase the amount of capital banks must use for their lending. The UK’s near-record current account deficit, the gap between what Britain buys and sells plus losses on overseas ventures, relies on foreign direct investment that could be damaged by continued uncertainty, the committee said. That funding, which helps finance Britain’s public sector deficit and corporate investment, could be affected by the referendum, the Bank warned.
The committee, which met last week, said: “The FPC judges that the outlook for financial stability in the United Kingdom has deteriorated since it last met in November 2015. Domestic risks have been supplemented by risks around the EU referendum.” Related: Whether it likes it or not, Bank of England is in the thick of Brexit debate
“The committee assesses the risks around the referendum to be the most significant near-term domestic risks to financial stability,” the FPC said. “The FPC judges that the outlook for financial stability in the United Kingdom has deteriorated since it last met in November 2015. Domestic risks have been supplemented by risks around the EU referendum.”
The FPC said the referendum could reinforce existing weaknesses in the system and increase concerns in funding markets already unnerved by global volatility this year. A decision to leave the EU could damage the eurozone’s economy with a spillover to UK trade and the economy, the committee added.
The committee, whose job is to protect the financial system, set out a range of risks that had increased, including weak emerging market economies, especially China, low profitability for banks and falling asset prices. It warned of a potential threat to financial stability from lax buy-to-let mortgage lending as the Bank’s regulatory arm set extra tests for loans to landlords.
Mark Carney, the Bank’s governor, told MPs this month the referendum was the main home-grown threat to stability but the FPC’s warning formalises the threat and gives it the backing of the full committee. It also sets out in stark terms the potential impact on the government and households if markets take fright at a possible vote to leave.
The campaign to stay in the EU seized on the FPC’s warning, stressing its makeup of experts independent of Carney, who chairs the committee. Carney’s warning to MPs caused a political row as supporters of leaving the EU accused him of compromising the bank’s independence.
Alistair Darling, chancellor in the final years of the last Labour government, said: “This assessment makes it clear our economy would be more vulnerable and less resilient if we vote to leave the EU – leading to higher mortgage rates for families and higher interest rates for Britain’s businesses. It is a serious piece of work that should make everyone think twice about irresponsibly gambling with people’s jobs and livelihoods.”
Related: Bank of England must burst the buy-to-let bubble nowRelated: Bank of England must burst the buy-to-let bubble now
The FPC said household debt was relatively high and that the risks from credit growth had risen beyond their subdued levels following the financial crisis though it said they were not yet “elevated”. The FPC said the EU vote was an added threat to financial stability on top of risks that were on the rise. Household debt is relatively high and the risks from credit growth have risen beyond their subdued levels following the financial crisis though they are not yet “elevated”, the committee said.
On buy-to-let lending, the committee said: “The FPC remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.” The Bank is taking action to rein in buy-to-let mortgage lending, which it has been watching with concern for some time. Last year, the stock of buy-to-let mortgages increased by 11.5% while the stock of lending to owner occupiers remained unchanged.
The committee, chaired by the governor, Mark Carney, said it expected measures announced by the Bank’s regulatory arm, the Prudential Regulatory Authority, to dampen the market. The market has leapt back into life over the past three years after slumping during the financial crisis. Last year, gross lending for buy-to-let property jumped to about £37bn, up from less than £10bn in 2009 and approaching the peak of almost £45bn in 2007.
The buy-to-let property market has leapt back into life over the past three years after slumping during the financial crisis. Last year, gross lending for buy-to-let property jumped to about £37bn, up from less than £10bn in 2009 and approaching the peak of almost £45bn in 2007. Lenders plan to increase buy-to-let lending by an average of 20% a year over the next two years, the Bank’s regulatory arm, the Prudential Regulation Authority, found. About a quarter of lenders are applying weaker lending standards than the market norm, raising fears they will suffer large losses if the market changes.
The FPC said it “remains alert to potential threats to financial stability from rapid growth in buy-to-let mortgage lending.”
The Bank has been monitoring the market’s resurgence closely for its potential to cause a new property crash with reverberations for banks and the wider economy.The Bank has been monitoring the market’s resurgence closely for its potential to cause a new property crash with reverberations for banks and the wider economy.
Last year, the stock of buy-to-let mortgages increased by 11.5% while the stock of lending to owner occupiers remained unchanged, the PRA said. The Prudential Regulatory Authority, the Bank’s regulation arm, is concerned that changes to mortgage interest tax relief for landlords will strain buy-to-let borrowers and that only a few lenders include this risk when assessing mortgage applications.
Lenders plan to increase buy-to-let lending by an average of 20% a year over the next two years, the PRA found. About a quarter of lenders are applying weaker lending standards than the market norm, raising fears they will suffer large losses if the market changes. The PRA set out measures it predicted would reduce the number of new buy-to-let mortgages by 10-20% during 2018:
The PRA is concerned that changes to mortgage interest tax relief for landlords will strain buy-to-let borrowers and that only a small number of lenders are including this risk when assessing mortgage applications.
The PRA set out four measures designed to tighten buy-to-let lending standards:
The PRA will start talking to lenders immediately and publish its final requirements at the end of July, giving lenders about a month to implement them.The PRA will start talking to lenders immediately and publish its final requirements at the end of July, giving lenders about a month to implement them.
The FPC added the EU referendum to its list of risks to financial stability. It said the run-up and aftermath of the vote could increase the price investors require to invest in UK assets, forcing down sterling and affecting the cost and availability of financing for UK borrowers. Banks have become financially stronger in the past three years but weaker earnings could reduce their ability to withstand shocks. After testing the banks against a crisis scenario, the FPC has told them to increase their capital buffers by half a percentage point to prepare for possible turbulence that could cause bad debts to rise.
The UK’s current account deficit, the gap between what Britain buys and sells, relies on foreign direct investment that could be hurt by continued uncertainty. Also, a decision to leave the EU could damage the eurozone’s economy with a spillover to UK trade.
“The committee assesses the risks around the referendum to be the most significant near-term domestic risks to financial stability,” the FPC said.
Banks have become financially stronger in the past three years but weaker earnings could reduce their ability to withstand shocks. After “stress testing” the banks, the FPC has told them to increase their “countercyclical” capital buffers by half a percentage point to take account of increased risks to their financial strength.