Bank of England’s quest to prevent property prices falling

The Bank of England is clamping down on buy-to-let mortgage lending to in a bid to prevent a house price crash.

The Bank of England has announced a clampdown on buy-to-let landlords as part of wider measures designed to help prevent house prices from falling sharply.

Having long provided bumper double-digit returns for investors, investment in buy-to-let continues to outperform all major asset classes, and with population pressures expected to continue to drive demand, rental prices look set to soar in the medium to long term, which will inevitably attract more investors into the buy-to-let market.

But the Bank is concerned that a sharp rise in risky lending, in the form of buy-to-let loans, could lead to a future housing market crash, which would be bad news for millions of people who have invested in property, as part of their retirement.

Bailey, the head of Prudential Regulation Authority, told the press that the Bank of England has “nothing against” buy-to-let landlords, but believes that new restrictions on mortgages for buy-to-let investors will help reduce the risk of “very volatile boom and bust conditions”.

He said: “I don’t think it benefits anybody, including people who own buy-to-let properties, to have an unsustainable boom-bust cycle in the UK property market. I’ve been in the Bank for 30 years and I’ve seen two of them happen and I’m very keen not to see a third one.”

Mortgage lenders will now have to take into account all the costs a landlord might have to pay when renting out a property as well as the borrower’s wider financial situation, including their personal tax liabilities and living costs.

PPA says: With a growing number of savers opting to cash in their pensions under the government’s new freedoms and invest in buy-to-let properties, it would appear that Bailey is ultimately concerned that a house price crash would pose a major risk for pensioners who rely on property investments to fund their retirement. 

More than 1.7 million properties have buy-to-let mortgages, which represented 17% of loans used to acquire residential properties last year. 

“You might form expectations about what the necessary long-term saving to support your retirement will be, which can then [if house prices fall] be transformed quite suddenly in ways that, frankly, are unwelcome,” Bailey said. 

Experts estimate that the Bank’s new lending criteria could reduce lending to landlords by up to 20% over the next three years, which would reduce the supply of housing in the buy-to-let sector, which in turn could actually push rents, and possibly even house prices, up even further.