14:09 PM, 24th December 2015, About 6 years ago 8
David Strange, a member of Property 118, recently wrote to Mark Carney, Governor of the Bank of England, about the Government’s plans to restrict finance cost relief for individual landlords. The exchange between Mr Strange and Mr Carney reveals that the Bank of England Governor acknowledges that the recently announced changes to landlord taxation have the potential to affect activity in the buy-to-let sector materially.
“Dear Mr Carney
I would like to think of myself as a cautious and prudent individual with a career of over seventeen years advising on financial planning, investment and taxation. Whilst not all private landlords will have that background many, if not most, or perhaps even the greatest majority would seek to deploy their capital in an effective way to secure a reasonable running yield, the maintenance and enhancement of the housing stock and quality and assured accommodation for their tenants.
You have apparently identified the BTL sector as a risk to financial stability, I believe this is misplaced on several counts.
1) private landlords, even those incorporated and with ten’s of thousands of units, are not charities and look to profit on their investment of both capital and time, as with any walk of life there will be some who behave recklessly just as with some central bankers.
2) Those with debt may have historically sought to tune their gearing to provide a modest positive cashflow but today the “best” rates offered of around 3.5% already encourage an LTV of 75% and with lender stress testing up to nearly 6% on a 125% of rental coverage. I personally stress test on up to 8% allowing for all actual costs, contingencies, and voids.
a. On this basis the BTL sector is of far less a threat to stability than the owner-occupier currently paying far lower rates and on higher LTVs and thus at greater risk from rate increases given the constraint on domestic budgets.
3) There is in fact no “BTL” sector as it is highly fragmented both as to participants and the housing need they address.
a. The instability introduced by the recent actions by the Chancellor and the BoE are a direct threat to the continued housing of some of the UK’s most vulnerable citizens, Housing Benefit claimants, the long term unemployed, former prisoners or those with other life challenges leaving them unsuitable as mortgage borrowers. This threat emanates from the Chancellor’s injudicious taxation of turnover under Clause 24 which will cause a reduction in supply as some to exit entirely or migrate their business away from rent constrained tenants and the deterrence of new entrants as a result of the raised cost of entry.
b. I do not have such tenants but provide solely for the mobile professional and senior and international student; all still equally unsuitable as prospective purchasers. Although not uniquely, such people are often government or corporate funded and thus with a high degree of financial security. If the PRS for such a market diminishes the UK will lose valuable foreign exchange in addition to the substantial expenditures made on educational services, corporate presences, and the local service industries.
4) The notion that my actions are “denying home owners” is misplaced.
a. My objective is to secure well located units at an un-elevated price and disengage whenever faced with an HO on a prospective purchase as it is they who will bid the price up of both the specific property, and importantly agent expectations, which is the very last thing that prudent landlords would want to do.
b. I have walked away from even existing let properties where the financials do not work leaving such units to become available to prospective HOs toward the end of the tenancy.
c. It is incorrect to talk of HOs being “outgunned” as I already have to inject more capital and pay higher interest rates than HOs.
I could make many more points but for clarity at this point let them rest.
The actions of the Chancellor and the BoE appear to speak more to the gallery of public misperception and the undoubted but unvoiced need to balance the budget in the former and in the latter the misunderstandings in Europe of the British lending sector which has long been the case.
Neither the Chancellor nor the Financial Secretary to the Treasury has given coherent reasons for, nor the true implications of, either recent measure affecting the PRS. At best sic. we have a disingenuous reference to the correct taxation of those with the highest incomes (perhaps appropriate in respect of pension contribution tax relief) when many landords have only a moderate income when taking account of a normal business cost and the many whose lives have had an unexpected instability introduced by suddenly finding themselves significant higher and additional rate tax payers with all the secondary consequences that flow.
As for the BoE I have seen little evidence for the contentions made as to the potential impact of the sector on the stability of the country nor of the propsed and actual constraints, I would welcome the publication of such evidence and analysis.
Mr Carney replied as follows:
“Dear Mr Strange,
Thank you very much for taking the time to contact me. While decisions on tax fall to the Government, as you note in your email the Bank of England has been monitoring the buy-to-let mortgage market closely. Your description of some of the more salient aspects of the market is welcome, and a valuable contribution to our analysis of the market and the risks it poses to financial stability. This is particularly the case in the context of recently announced changes to taxation arrangements.
The Bank’s remit in this area – through the Financial Policy Committee – is to guard against risks to financial stability. That means our aim with regard to buy to let lending – and other forms of credit – is to ensure that growth is sustainable. In particular, we are conscious of the risk that a build-up of highly indebted buy-to-let landlords could make the housing market – and wider economy – more volatile if those borrowers are forced to sell as prices are falling. To guard against this, we are focussed on the trends around the quantity and type of lending, but also the underwriting standards of lenders, rather than simply on the growth of buy-to-let per se. While to date we have not seen evidence of widespread deterioration in underwriting standards – and in fact, as you observe, some lenders have actually tightened their lending standards – it is important that the quality of lending is kept under review.
As discussed in the most recent Financial Stability Report, the Bank and the Financial Policy Committee are conscious of the growth in buy to let lending in the UK. However, we are also aware that this growth since the financial crisis must be seen in the context of the sharp fall in lending during the crisis, and the ongoing structural shift towards a larger private rental sector. Like you, we view the recently announced changes to taxation as having the potential to affect activity in the buy-to-let sector materially. Our monitoring of buy to let activity will look to identify changes of the sort you describe, and we will share our intelligence with HM Treasury as appropriate.
I can assure you that the Bank will continue to act proportionately in respect of this market and is aided in doing so by contributions like yours.
With best wishes,
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