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Fairyland

Uk Landlords: The Boe Is Keeping A Close Eye On You

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Link: http://www.bloomberg.com/news/articles/2016-03-11/those-second-and-third-homes-are-making-mark-carney-nervous

If you're buying a rental home in the U.K. you're making the Bank of England nervous.

Governor Mark Carney and his colleagues have repeatedly said a surge in buy-to-let property investment may pose a risk to financial stability. With the central bank's Financial Policy Committee grappling with that question, it's trying to get extra powers to intervene in the market. A U.K. Treasury consultation on new tools for the institution closes on Friday.

Policy makers are worried because almost seven years of record-low benchmark borrowing costs and measly savings rates have bolstered appetite for property. At the end of last year, mortgages taken out by investors were rising more than twice as fast those for owner occupiers and now the totals are creeping toward pre-recession levels.

Against that backdrop, the FPC wants powers to curb loan-to-value ratios and interest-coverage ratios in the buy-to-let market. It's already got those for the owner-occupier segment and this would bring property investors into line.

Carney will lead a meeting of the FPC on March 23, and while it won't have these powers by then, buy-to-let will probably feature in their discussions.

BOE Deputy Governor for Financial Stability Jon Cunliffe, a member of the committee, said this month that housing risks are increasing. He also singled out buy-to-let lending as a potential threat on the grounds that any downturn in the market could be amplified if it all investors wanted to sell at the same time.

"There could be risks to financial stability if it starts a spiral downward. We dont have much experience of a stock of buy-to-let mortgage investors of this size."

Before it's here, it's on the Bloomberg Terminal.

Edited by Fairyland

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Since when is the BOE keeping a close eye? And, is that all what they will do?

It is clearly keeping a close eye as can be seem from its Financial Stability reports.

And as the financial regulator, it has plenty of tools available.

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Ever vigilant. Ever monitoring. Ever assessing.

So reassuring.

I really do sleep well at night safe in the knowledge they're doing such a good job.

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When the BoE talks about "risk" in the housing market what they actually mean is the risk of a big drop in house prices. They see no problem with the risk of house prices rising 50% in a few years from an already high base.

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It is clearly keeping a close eye as can be seem from its Financial Stability reports.

And as the financial regulator, it has plenty of tools available.

No unsafe lending should be allowed. There should be NOTHING to keep an eye on.

Banks that lend badly should be shut down.

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"Against that backdrop, the FPC wants powers to curb loan-to-value ratios and interest-coverage ratios in the buy-to-let market. It's already got those for the owner-occupier segment and this would bring property investors into line. "

At a time when the average LTV was 3.2x household income they used their powers to announce only 15% of mortgages could greater than 4.5x household income.

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When the BoE talks about "risk" in the housing market what they actually mean is the risk of a big drop in house prices. They see no problem with the risk of house prices rising 50% in a few years from an already high base.

I can't buy this argument. All the evidence of conduct points to the opposite being the case. They don't care about house prices one jot. They track debt servicing ratios (DSRs) and loan to incomes. Loan to incomes for new borrowing flow fall when house prices fall and if credit conditions remain constant so do DSRs, hence the red lights on the FPC's dashboard go green when house prices fall.

The evidence supports the assumption that in early 2014 the Bank of England bought the idea that a key driver of LTIs in the owner-occupier sector was the need to compete with market participants who were using BTL or were effectively part-financed with BTL.

In July 2015 Osborne indicated that one of the things that made the changes regarding the deductibility of mortgage interest for BTLers calculating taxable profits was the Bank of England's concern regarding the financial stability risks related to the existence of a large BTL sector. Carney's Bank is one of the ten central banks drawing up BCBS revisions to the Standardised Approach and the work on capital floors (h/t Neverwhere) that will result in a harmonisation of Advanced IRB methods with the capital requirements under the Standardised Approach. Taken together these two measures are likely to shrink the buy-to-let sector.

Whilst I understand scepticism predicated on past experience, if that scepticism shades into determined cynicism that compels one to see black as white in order to harmonise the new information with the previously existing cynical view it may result in misreading key factors which are changing the structure of credit that support present prices. It is because naive BTLers know absolutely nothing about what is coming down the track that they have rushed into buy-to-let ahead of the April SDLT deadline. That is their funeral.

I may be wrong about the nature and significance of what is being cooked up for BTL by the Bank of England and the Treasury, but the evidence points the other way. To take a thread about an article documenting how the Bank and Treasury are evidently intending to change the structure of lending and use it as a pre-text to repeat the refrain that offers succour to every pig ignorant HPI+++ forever moron everywhere is odd. John Heron at Paragon seems genuinely concerned, and if he is concerned his customers, who are carrying a shit ton of risk, ought to be very concerned, (and then they ought to sell).

Basically, in July 2015 there were threads on here saying "they're going to f**k up the BTL morons". Now, about nine months down the line, there are a steady flow of mainstream media articles saying the same thing. The reason for this is that what the BoE and HMT are doing matches with a careful reading of what they are saying. As the most significant parts of these changes for BTL (BCBS risk-weights and Clause 24) won't begin to bite till 2017-2019 this gives you an indication of how grim the future of high-leverage BTL may well be. If the manner of your execution is making news two years before it shows up, it is unlikely that you're going to be allowed to reach your dotage and die in your sleep.

If you buy the contention that it is Bank of England pressure which led to the BTL gang getting the good news about the tax deductibility of interest ahead of the rest of the business sector (who may well get it in next week's budget) then stroll over to Property118 and get a feel for exactly how sanguine they are about the BoE being all talk.

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"Against that backdrop, the FPC wants powers to curb loan-to-value ratios and interest-coverage ratios in the buy-to-let market. It's already got those for the owner-occupier segment and this would bring property investors into line. "

At a time when the average LTV was 3.2x household income they used their powers to announce only 15% of mortgages could greater than 4.5x household income.

Did you listen to Cunliffe's oral evidence to the Lords Economic Affairs select committee?

I think that it's naive to suppose that the Bank will generally act like a mother grabbing a toddler by the coat hood and pulling them out of the play park. It's more like a sheep dog taking up a position and directing the sheep (the banks) away from a line of escape they might otherwise have been favouring.

You have to ask yourself a counter-factual; what would lending practices to owner-occupiers look like today absent those 2014 changes? At present it looks like borrowing is crowding up against the soft cap, so there is clearly a willingness to borrow at very high-LTIs.

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The BoE eternal vigilance must be working - we've not been eaten by intergalatic space goats.

I wonder if the slowing to crack down on IO BTL is due to its unregulated status.

I would expect the BoE get a daily loans update from Nationwide and Skipton on the performance.

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BOE Deputy Governor for Financial Stability Jon Cunliffe, a member of the committee, said this month that housing risks are increasing. He also singled out buy-to-let lending as a potential threat on the grounds that any downturn in the market could be amplified if it all investors wanted to sell at the same time.

"There could be risks to financial stability if it starts a spiral downward. We don’t have much experience of a stock of buy-to-let mortgage investors of this size."

May be they want to crack on BTL but avoid HPC?

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Basically, in July 2015 there were threads on here saying "they're going to f**k up the BTL morons". Now, about nine months down the line, there are a steady flow of mainstream media articles saying the same thing. The reason for this is that what the BoE and HMT are doing matches with a careful reading of what they are saying. As the most significant parts of these changes for BTL (BCBS risk-weights and Clause 24) won't begin to bite till 2017-2019 this gives you an indication of how grim the future of high-leverage BTL may well be. If the manner of your execution is making news two years before it shows up, it is unlikely that you're going to be allowed to reach your dotage and die in your sleep.

If you buy the contention that it is Bank of England pressure which led to the BTL gang getting the good news about the tax deductibility of interest ahead of the rest of the business sector (who may well get it in next week's budget) then stroll over to Property118 and get a feel for exactly how sanguine they are about the BoE being all talk.

Indeed - this site is well ahead of where the media is and the arguments made here first are echoed eventually in BoE publications, just with better data.

The BoE is only concerned about house prices to the extent that they could threaten financial stability. Our ability, or otherwise, to be able to buy is not its concern per se, but what is its concern is that of a speculative bubble built on leveraged real estate - it knows the consequences. It is unlikely to want an all out crash - this in itself could have wider impact on financial stability in its view, but it would no doubt be happy to see the bubble deflate and the speculative element removed.

But as an organisation it clearly moves too slowly - it likes to appear considered. John Cunliffe spoke of a "potential risk" - clearly an understatement and I would read this as meaning a "massive risk".

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May be they want to crack on BTL but avoid HPC?

Exactly. I think we'll see some further support for householders with mortgage as they remove the support for BTL. The aim would be to keep house prices level.

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May be they want to crack on BTL but avoid HPC?

Where does everyone get this idea that the Bank of England want to avoid a house price crash from?

ZIRP isn't here to ensure that some mug punter avoids negative equity. House prices (and mortgage credit) are a big deal, but they are not the UK economy, (and UK housing and mortgage credit is not driving the world economy FFS). The role of ZIRP in the housing market since about 2009 is that it is enabling mug punters to pay their mortgages (and hence helps maintaining an appearance of banking sector solvency which would be rather more difficult to pass off if half the Lloyds Group loan book was in arrears). ZIRP thus allows the over-leveraged mortgage prisoners to try to hang on whilst hoping for a miracle (though of course it doesn't force them to do that) and this affects house prices because it lessens the motivation to sell, but still its express purpose is not to hold up house prices.

The Bank have been totally clear that they believe that they banks can now take a massive HPC without any attendant threat to their solvency. It's also blindingly obvious that they are far more concerned about house prices staying at this level and transactions increasing (driving up LTIs and DSRs) than they are about house price falls.

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Where does everyone get this idea that the Bank of England want to avoid a house price crash from?

ZIRP isn't here to ensure that some mug punter avoids negative equity. House prices (and mortgage credit) are a big deal, but they are not the UK economy, (and UK housing and mortgage credit is not driving the world economy FFS). The role of ZIRP in the housing market since about 2009 is that it is enabling mug punters to pay their mortgages (and hence helps maintaining an appearance of banking sector solvency which would be rather more difficult to pass off if half the Lloyds Group loan book was in arrears). ZIRP thus allows the over-leveraged mortgage prisoners to try to hang on whilst hoping for a miracle (though of course it doesn't force them to do that) and this affects house prices because it lessens the motivation to sell, but still its express purpose is not to hold up house prices.

The Bank have been totally clear that they believe that they banks can now take a massive HPC without any attendant threat to their solvency. It's also blindingly obvious that they are far more concerned about house prices staying at this level and transactions increasing (driving up LTIs and DSRs) than they are about house price falls.

What gives you the idea that anybody at the Bank of England knows what day of the week it is, or even cares? Mervo the Clown oversaw the greatest clusterf**k in the Bank's entire history and his reward was a K and a six figure pension! Cunliffe is one of Brown's placemen, at the heart of the Treasury when RBS, Northen Rock, AIG et al ran their vast international rackets from the City of London. If the BBC suspected in 2003 that liar loans were the driving force behind an out-of-control lending bubble why didn't this cretin? Or perhaps he did, and said nothing while quietly lining his own pockets. Failure is always an orphan but rarely has the orphanage been so lavishly appointed.

As for excessive mortgage debt not being the crutch which holds up the UK economy? How else are we expected to interpret the household debt projections from the OBR, using a macroeconomic model it co-owns with the Treasury?

Edited by zugzwang

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What gives you the idea that anybody at the Bank of England knows what day of the week it is, or even cares? Mervo the Clown oversaw the greatest clusterf**k in the Bank's entire history and his reward was a K and a six figure pension! Cunliffe is one of Brown's placemen, at the heart of the Treasury when RBS, Northen Rock, AIG et al ran their vast international rackets from the City of London. If the BBC suspected in 2003 that liar loans were the driving force behind an out-of-control lending bubble why didn't this cretin? Or perhaps he did, and said nothing while quietly lining his own pockets. Failure is always an orphan but rarely has the orphanage been so lavishly appointed.

As for excessive mortgage debt not being the crutch which holds up the UK economy? How else are we expected to interpret the household debt projections from the OBR, using a macroeconomic model it co-owns with the Treasury?

Firstly, your criticism of Cunliffe is that as a civil servant he didn't have the last word on policy?

Secondly, on the OBR projections - you're just pulling my leg. They have a stupid model, numbers come out. The numbers are stupid and have no bearing on anything. Surely you've seen this:

More%2BOBR.png

Thirdly, the stock of debt to owner-occupiers basically stopped growing in 2008 and since then they've implemented MMR and the FPC soft-cap on LTIs. They are actively killing BTL. If the Bank think that recovery means growth in the stock of secured lending, they're going about it in a bloody peculiar way.

In 2008 the game changed in some important ways, narratives about the inherent stability of the financial system caught a bullet. Pure speculation on my part, but maybe the careers that didn't catch the same bullet weren't on the boostersish Goldman Sachs is right by definition side of the argument.

Edited by Idlewild

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Exactly. I think we'll see some further support for householders with mortgage as they remove the support for BTL. The aim would be to keep house prices level.

Am I alone in thinking we could be missing the bigger picture here?

Here comes this article, with someone quoted from the BOE.

We now live in an environment where political decisions are "stage managed" to the extreme.

Is there not a budget this coming week?

Another kick for BTL perhaps?

Maybe the much discussed granting actual powers to BOE in relation to BTL?

Edited by bubbleturbo

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Am I alone in thinking we could be missing the bigger picture here?

Here comes this article, with someone quoted from the BOE.

We now live in an environment where political decisions are "stage managed" to the extreme.

Is there not a budget this coming week?

Another kick for BTL perhaps?

Maybe the much discussed granting actual powers to BOE in relation to BTL?

I sincerely hope so but expecting to be let down yet again

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Am I alone in thinking we could be missing the bigger picture here?

Here comes this article, with someone quoted from the BOE.

We now live in an environment where political decisions are "stage managed" to the extreme.

Is there not a budget this coming week?

Another kick for BTL perhaps?

Maybe the much discussed granting actual powers to BOE in relation to BTL?

I think so. Given the consultation only ended last Friday perhaps what will be announced is a clear timetable in which decisions will be made and powers will be handed over, rather than details on the exact extent of the powers themselves?

Then again this has been on the cards for some time and Osborne has already indicated that he fully intends to give the Bank at least some powers in this regard. Either way I would be a little surprised if it didn't warrant a mention.

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Did you listen to Cunliffe's oral evidence to the Lords Economic Affairs select committee?

I think that it's naive to suppose that the Bank will generally act like a mother grabbing a toddler by the coat hood and pulling them out of the play park. It's more like a sheep dog taking up a position and directing the sheep (the banks) away from a line of escape they might otherwise have been favouring.

You have to ask yourself a counter-factual; what would lending practices to owner-occupiers look like today absent those 2014 changes? At present it looks like borrowing is crowding up against the soft cap, so there is clearly a willingness to borrow at very high-LTIs.

Sorry but you are making my point for me now. At the time of that soft "cap" the average LTV was only 3.2 so I called it a rallying call for people to borrow more, as they might not be aware that they could. My fear was that LTVs would increase so 4.5x became the norm, which it is if you say it's crowding up under it. I think 4.5x is way too much but if you are happy with that much fair enough. The 15% above 4.5x enables enough people to borrow too much, which then forces people who wanted to only borrow 3.5x etc. to have to borrow more if they want to compete on price. What next? If 4.5x household income is the norm, do they target 5x as the next norm but only 15% can be greater than 5.5x or 6x?

When the average was 3.2x I still don't see 4.5x (or more) as any kind of limit. It's pushed LTVs and so prices up since (isn't that the proof of their intentions?). Only if they next do a figure lower than the current average e.g. 4x if the average is over 4x would I agree it's a limit!

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Sorry but you are making my point for me now. At the time of that soft "cap" the average LTV was only 3.2 so I called it a rallying call for people to borrow more, as they might not be aware that they could. My fear was that LTVs would increase so 4.5x became the norm, which it is if you say it's crowding up under it. I think 4.5x is way too much but if you are happy with that much fair enough. The 15% above 4.5x enables enough people to borrow too much, which then forces people who wanted to only borrow 3.5x etc. to have to borrow more if they want to compete on price. What next? If 4.5x household income is the norm, do they target 5x as the next norm but only 15% can be greater than 5.5x or 6x?

When the average was 3.2x I still don't see 4.5x (or more) as any kind of limit. It's pushed LTVs and so prices up since (isn't that the proof of their intentions?). Only if they next do a figure lower than the current average e.g. 4x if the average is over 4x would I agree it's a limit!

You'll have to explain how I am making your point.

I realise that without inside knowledge my speculation and your speculation may both be supported by the data, subject to how that data is interpreted.

That said, you've ducked my question about whether you listened to Cunliffe.

My analysis would be that the Bank of England is tackling buy-to-let because they are anxious that it is the presence of investor demand that is driving owner-occupiers up to ever higher LTIs.

Your belief that the soft-cap is a "rallying call" to ever higher LTIs is contentious. Rising LTIs are not unambiguous evidence that you are correct. It could also be interpreted as evidence that the steps taken to hold down LTIs are not yet adequate to the task.

Under the analysis that there is a sustained attempt to hold down owner-occupier LTIs what you'd expect to see now is an attempt to rein in investor demand, (which is what we are seeing).

Under your analysis, that the Bank of England desire chasing LTIs to 5x joint, then 6x joint, the following require explanation, and I'm interested to hear any explanation you have to offer.

  • The best way to chase up owner-occupier LTIs is to let BTL investor demand chase up prices, hence the Bank should encourage BTL demand. The Bank should not seek FPC powers of direction to apply rental cover standards (presumably linked to 'normal' rates of 5% rather than prevailing market rates).
  • In order to chase up owner-occupier LTIs, don't require owner-occupier mortgages to be written on a repayment basis as constant earnings can support far higher LTIs on an interest-only basis. Hence the Bank should have watered down the MMR entirely. (The extent to which the failure to limit mortgage terms softens the impact of MMR is easy to exaggerate - compared to the status quo ante (no rules on interest-only, no rules on certification of earnings and no rules on mortgage terms) post-MMR owner-occupiers live in a different world.)
Edited by Idlewild

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You'll have to explain how I am making your point.

I realise that without inside knowledge my speculation and your speculation may both be supported by the data, subject to how that data is interpreted.

That said, you've ducked my question about whether you listened to Cunliffe.

My analysis would be that the Bank of England is tackling buy-to-let because they are anxious that it is the presence of investor demand that is driving owner-occupiers up to ever higher LTIs.

Your belief that the soft-cap is a "rallying call" to ever higher LTIs is contentious. Rising LTIs are not unambiguous evidence that you are correct. It could also be interpreted as evidence that the steps taken to hold down LTIs are not yet adequate to the task.

Under the analysis that there is a sustained attempt to hold down owner-occupier LTIs what you'd expect to see now is an attempt to rein in investor demand, (which is what we are seeing).

Under your analysis, that the Bank of England desire chasing LTIs to 5x joint, then 6x joint, the following require explanation, and I'm interested to hear any explanation you have to offer.

  • The best way to chase up owner-occupier LTIs is to let BTL investor demand chase up prices, hence the Bank should encourage BTL demand. The Bank should not seek FPC powers of direction to apply rental cover standards (presumably linked to 'normal' rates of 5% rather than prevailing market rates).
  • In order to chase up owner-occupier LTIs, don't require owner-occupier mortgages to be written on a repayment basis as constant earnings can support far higher LTIs on an interest-only basis. Hence the Bank should have watered down the MMR entirely. (The extent to which the failure to limit mortgage terms softens the impact of MMR is easy to exaggerate - compared to the status quo ante (no rules on interest-only, no rules on certification of earnings and no rules on mortgage terms) post-MMR owner-occupiers live in a different world.)

At the time the "limit" was imposed I said it wasn't a limit but a call for more lending. Now you say lending is crowding under 4.5x, so if that's higher than than 3.2, you are making my point that it was to increase not limit lending.

I only skimmed Cunliffe the other day because I'm not that interested in what they say, more what actual policies are announced.

My 5x and 6x was sarcasm. As in, if a "limit" of 4.5x when the average was only 3.2x, what next?

Since the "limit", has the average moved up from 3.2x and have house prices increased?

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Why anyone should be talking so many times gross income with interest rates hovering on next to zero....it should be so much as a percentage of income on a repayment basis debt paid in full by Max state retirement age, sooner rather than later.....35% of gross anual income would be a good ballpark figure of main income......ie income £2000 per month....repayment loan no more than £700 per month......

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At the time the "limit" was imposed I said it wasn't a limit but a call for more lending. Now you say lending is crowding under 4.5x, so if that's higher than than 3.2, you are making my point that it was to increase not limit lending.

By that logic if we had 100 borrowers with a credit card with a limit of £6000 but a balance of only £2000, announcing that moving forward 85% of borrowers would be restricted to a credit limit to £5000 would be "calling for more lending" by making borrowers "aware" of how much they could borrow. In reality whether borrowers borrowed more or not would depend on a wealth of factors but if there were sustained pressures to borrow at a certain point the lending cap would bite and hence if what you wanted was more borrowing, why on Earth would you use a cap as a marketing scheme? It makes no sense.

I realise you are totally sold on the idea that limiting the flow of lending about 4.5x was a call for more lending, but I assure you that argument is not in the least compelling and the increase in the average LTIs does not evidence the veracity of your contention.

Edited by Idlewild

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