Norman Lamont, Chancellor of the Exchequer between 1990 and 1993 (during the last recession), has warned that the rapid growth of the buy to let sector should not be cause for “unqualified celebration”.
It was recently reported that lending to landlords surpassed £5bn in the second quarter of 2013, marking a near five-year high, and £1 in every £10 lent by banks is to buy to let mortgage borrowers; but Lord Lamont has stressed that a spike in interest rates could spell catastrophe for the buy to let market.
Mike Carney, the new Governor of the Bank of England, has pledged that interest rates won’t rise until unemployment decreases from its current level of 7.8% to 7%, which the Bank does not anticipate until the middle of 2016. However, Lord Lamont hinted that the UK may see a repeat of the circumstances that led to the economic crisis in 2008:
"The Bank and the government need to keep a careful eye on the buy to let market. This is expanding very rapidly at the moment and it was an over-rapid expansion of it before that caused the demise of Bradford & Bingley."
According to research released by YouGov at the end of July, a growing number of landlords are saying that they are investing in the buy to let property market for primarily short term gains. A sharp rise in rates might lead to a mass withdrawal from the sector, adversely affecting the housing market; it might also result in widespread mortgage arrears as repayment costs rise to meet the cost of funding.
The UK housing market
The UK property market has been struggling since the crash of 2008, and the buy to let sector has perhaps seen the most robust recovery since. Figures from the Royal Institute of Chartered Surveyors (RICS) show that construction began on 110,530 new homes in the year to June 2013 – a 7% increase on the previous 12 months. However, this is still short of the pre-recession peak, and the housing charity Shelter says that it is “less than half” of the number of new homes the UK needs to meet its housing shortage.
The buy to let property market is a vital aspect of the housing market in general, and the government and treasury should take steps to ensure its continuing health.