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Ah-so

Financial Stability Report 1 Dec

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The latest Bank of England Financial Stability Report is out. I have not had time to read it, but my search function tells me that there are 73 usages of "buy-to-let" in the 64 page document. Have not had time to read it yet (it came out 10 minutes ago) but there should be enough to keep me entertained on my morning commute. Some examples to whet your appetite:

Since 2010, credit loss rates incurred on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers.The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets, in particular in the typical interest rates used in affordability stress tests....

The buy-to-let sector continues to drive growth in the mortgage market. Greater competition in this sector has not to date led to a widespread deterioration in underwriting standards of UK banks. Nevertheless, strong growth in buy-to-let lending may have implications for financial stability. The FPC will monitor developments in buy-to-let activity closely following the tax changes to the buy-to-let market announced by the Chancellor in the Budget and Autumn Statement. The FPC supports the programme of work initiated by the PRA to review lenders’ underwriting standards....

New loans to buy-to-let investors are often subject to less stringent affordability tests than loans to owner-occupiers. According to industry standards, the affordability of a buy-to-let loan is typically tested by ensuring that the rental income exceeds 125% of loan interest payments at a mortgage interest rate of 5%–6%. In contrast, and in accordance with the FPC’s June 2014 Recommendation, the affordability of loans to owner-occupiers is tested by ensuring that the borrower has sufficient income to cover their mortgage payments at a more stringent mortgage interest rate of around 7%, despite owner-occupier mortgage rates tending to be around 0.7 percentage points lower.(1) Assessed against these affordability metrics, buy-to-let borrowers may be more vulnerable than owner-occupiers to an unexpected rise in interest rates or a fall in income. For example, if mortgage rates rose by 300 basis points, the increment by which the FPC recommended the affordability of mortgages to owner-occupiers is tested, nearly 60% of buy-to-let borrowers who took out loans recently would see their rental income no longer covering 125% of their interest payments. By comparison, only 4% of recent owner-occupier borrowers would see their mortgage debt costs rise to above 40% of income, a level above which households are more likely to experience payment difficulties

http://www.bankofengland.co.uk/publications/Documents/fsr/2015/dec.pdf

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This is one take on one of the BoE's reports from the BBC Business live feed. So the journo is parsing the report as "Everything is awesome" and "Back to business as usual, banker chappies", am I correct?

"The Bank of England has produced two reports dealing with the issue of financial stability. Its key message? That the UK's major banks are in a relatively resilient state and that the need for ever higher regulatory controls is coming to an end.

Yes, the Royal Bank of Scotland and Standard Chartered had to do some work to strengthen their position - but none failed the stress test.

This is an "inflection point" in the post-financial world - a new chapter, the Bank signalled. It does not believe in a "long march to ever more capital" and feels that banks are now handling risk more prudently."

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Don't get too excited. Skipped through it, but in a nutshell:

Buy to let is a risk to financial stability:

The buy-to-let sector continues to drive growth in the UK mortgage market. Since 2008, the outstanding stock of buy-to-let lending has grown by 5.9% per annum on average, compared with only 0.3% growth in the stock of lending to owner-occupiers. In the year to 2015 Q3, the stock of buy-to-let lending rose by 10%. Greater competition in this sector has not to date led to a widespread deterioration in underwriting standards of UK banks. But some smaller lenders have loosened their lending policies, for example by raising their maximum LTV thresholds. Strong growth in buy-to-let lending is driven in part by a structural shift in tenure to the private rental sector. But it may have implications for financial stability.

New loans to buy-to-let investors are often subject to less stringent affordability tests than loans to owner-occupiers. Assessed against relevant affordability metrics, buy-to-let borrowers may be more vulnerable to an unexpected rise in interest rates or a fall in income, which could exacerbate the scale of a fall in house prices. During an upswing in house prices, investors seeking capital gain can increase leverage including through the purchase of multiple properties. The resulting boost in demand can add further pressure to house prices, prompting both buy-to-let and owner-occupier borrowers to take on larger loans, thereby increasing indebtedness. Since 2010, credit loss rates incurred on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers.

But it's ok, they are being vigilant:

The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets, in particular in the typical interest rates used in affordability stress tests. The FPC will monitor developments in buy-to-let activity closely following the tax changes to the buy-to-let market announced by the Chancellor in the Budget and Autumn Statement. It supports the programme of work initiated by the Prudential Regulation Authority to review lenders’ underwriting standards. HM Treasury is planning to launch this year a consultation on giving to the FPC similar powers of Direction on buy-to-let mortgage lending as those it has already provided on owner-occupier mortgage lending. In the interim, the FPC stands ready to take action if necessary to protect and enhance financial stability, using its powers of Recommendation.

Actually, reading that second part again, it seems like a bit of a potato toss to Osborne, effectively saying that all they can do is recommend.

Still ******** though.

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Don't get too excited. Skipped through it, but in a nutshell:

Buy to let is a risk to financial stability:

But it's ok, they are being vigilant:

Actually, reading that second part again, it seems like a bit of a potato toss to Osborne, effectively saying that all they can do is recommend.

Still ******** though.

I read the main buy to let section on the tube into work. It is pretty damming.

The FPC does not yet have the power to do anything until the consultation goes through. But there is pretty strong signalling that it will.

For those who are familiar with this site, there is nothing new, but I think that the Bank is stating is concerns quite clearly. The data on vulnerability to a 300bp rate rise is particularly interesting.

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It seems that BOE by merely mentioning the risk feels insulated from any responsibility.

Remember they have control of rates so they'll do nothing, just continue being vigilant till the next shock.

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When the clock Radio 4 came on far too early this morning they were saying that the BoE test included house prices falling back to 2002 levels. If only...

well lets hope they will be tested very soon

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Words.

Skimmed on train.

Doesn't look like the called BTL a risk to financial stability as they did commercial real estate. They basically said commercial real estate is overvalued.

Edited by growlers

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Words.

Skimmed on train.

Doesn't look like the called BTL a risk to financial stability as they did commercial real estate. They basically said commercial real estate is overvalued.

"The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending"

It is almost as though you had made up your mind what it said before you vaguely skimmed through it.

Edited by Ah-so

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Compare what they said vs. The commercial real estate sector.

Seemed to me that they consider that a larger risk.

Is there anything on there materially different to the last report re. BTL? More of the same 'its on the radar' stuff. There's a bit about rate sensitivity I suppose but given the BOE don't expect rates to rise I doubt they care that much.

They also said no evidence of slippage of underwriting standards.

Edited by growlers

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I read the main buy to let section on the tube into work. It is pretty damming.

The FPC does not yet have the power to do anything until the consultation goes through. But there is pretty strong signalling that it will.

For those who are familiar with this site, there is nothing new, but I think that the Bank is stating is concerns quite clearly. The data on vulnerability to a 300bp rate rise is particularly interesting.

Yes, I take your point. I'm just fed up with everybody being vigilant and nobody actually doing anything about it.

But if I were into BTL I would be cacking myself that my investment had been identified as a risk to financial stability.

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When the clock Radio 4 came on far too early this morning they were saying that the BoE test included house prices falling back to 2002 levels. If only...

Er, have you visited some parts of the North East?

I can find quite a few places where the nominal prices are still in 2000-2004 range.

The real values are about 30% down.

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The spin around BTL/'investment property' was that s was a lot less risky than OOO lending.

This:

'Since 2010, credit loss rates incurred on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers.The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets, in particular in the typical interest rates used in affordability stress tests....'

And this is at emergency rates.

Before the BoE dropped rates, the majotiry of BTLer I know were heading rapidly to insolvency.

This is a report that says BTL is much more riskier than OOO.

The fact that BTL lending has accounted for approx. 50-80% of loans over the last 5+ years.

After this report, you can expect the capital charge on BTL lending to be cranked up a lot and a ban on BTL IO-only loans.

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In fairness (and you will not see me type that about the BoE very often) Osborne has perhaps ensured that leveraged BTL disappears to any significant degree in new mortgage business beyond April, and is also purged from existing mortgage books in the next few years as the tax relief reduction comes in.

I don't think it is unreasonable for the BoE to sit on the sidelines for the timebeing.

Edited by Cry and Regret

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Er, have you visited some parts of the North East?

I can find quite a few places where the nominal prices are still in 2000-2004 range.

The real values are about 30% down.

make that 50%

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The spin around BTL/'investment property' was that s was a lot less risky than OOO lending.

This:

'Since 2010, credit loss rates incurred on buy-to-let loans in the United Kingdom have been around twice those incurred on lending to owner-occupiers.The FPC remains alert to financial stability risks arising from rapid growth in buy-to-let mortgage lending and notes the difference in underwriting standards in the owner-occupier and buy-to-let mortgage markets, in particular in the typical interest rates used in affordability stress tests....'

And this is at emergency rates.

Before the BoE dropped rates, the majotiry of BTLer I know were heading rapidly to insolvency.

This is a report that says BTL is much more riskier than OOO.

The fact that BTL lending has accounted for approx. 50-80% of loans over the last 5+ years.

After this report, you can expect the capital charge on BTL lending to be cranked up a lot and a ban on BTL IO-only loans.

That's true - I don't recall seeing this in past FPC reports.

Nice to see them come down on this side of the argument (rather than the industry argument that arrears are lower signalling lower risk).

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After this report, you can expect the capital charge on BTL lending to be cranked up a lot and a ban on BTL IO-only loans.

If they do - and here's hoping - then this is going to have a much more dramatic effect in "levelling the playing field" than either of the (frankly, relatively minor) tax changes announced so far. It really will be the end of amateur BTL.

Edited by mattyboy1973

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If they do - and here's hoping - then this is going to have a much more dramatic effect in "levelling the playing field" than either of the (frankly, relatively minor) tax changes announced so far. It really will be the end of amateur BTL.

I don't think the playing will be levelled. I think the ball will be taken away for BTL.

Remember, this is a report.

They then amke + change policy on it - no more BTL IO lending.

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If they do - and here's hoping - then this is going to have a much more dramatic effect in "levelling the playing field" than either of the (frankly, relatively minor) tax changes announced so far. It really will be the end of amateur BTL.

are they levelling the playing field to desperate first time buyers can take advantage of the government's help to banks scheme and buy at these newly inflated prices?

low risk for the banks, HIGH risk for the tax payers.

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If they do - and here's hoping - then this is going to have a much more dramatic effect in "levelling the playing field" than either of the (frankly, relatively minor) tax changes announced so far. It really will be the end of amateur BTL.

Relatively minor is not how the most leveraged see it- the end of their solvency, more like. Besides, there is still further to go on the tax relief front, hopefully that possibility will be given appropriate consideration which will turn a few minds elsewhere.

People put disproportionate weight on small taxes anyway- car VED being a good example. I'm more optimistic about the effect both of these changes will have, but we shall see if it is well founded soon enough.

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The two positions may not necessarily be diametrically opposed.

It may simply reflect the tendency of lenders to treat lending on business terms differently. i.e. they are more likely to repossess an underperforming asset than the emotionally attached home of the borrower. What this ignores of course is a greater propensity to repossess the homes of renters over borrowers.

I agree.

I'd go further and argue that arrears on OO mortgages are more likely than BTL ones because OOers know they can get away with it. Regulated product and all.

Still default has to be the ultimate measure of risk surely.

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