Balance required if buy-to-let sector is to be regulated

28 June 2010

Following the Financial Services Authority’s Mortgage Market Review and the more recent consultation paper by the Treasury it is clear that regulation of the buy-to-let sector is high on the agenda.

But before taking such a step the FSA should give serious consideration to the effect of regulation on a sector that is still in a fragile state.

Latest Council of Mortgage Lenders figures show that there were only 22,000 advances for - quarter of the number of advances in Q1 2007.

So in deciding on regulation the authorities face a balancing act between protecting consumers and avoiding damaging the viability of the market. If the regulatory barriers are too high experienced investors may seek alternative homes for their money.

Blanket regulation across the sector must be avoided because experienced investors do not need the same level of protection as new entrants.

Many of the problems in the sector during the credit crunch arose from inexperienced investors entering the market and buying new properties, often off-plan and in the wrong areas. These were usually flats in already saturated markets.

These newcomers believed property was a win-win investment that could never go wrong. Many thought buying property was a better investment than contributing to a personal pension plan.

Buy-to-let regulation would not have prevented - and will not prevent - unwise investments being made

Comparisons between the performance of pension plans and property prices in 2005/06 led many to believe that investing in bricks and mortar was the way to ensure a secure retirement.

Of course, these are the individuals who have since paid a high price and would have benefited from the protection offered by regulation.
But experienced landlords should not be saddled with the same burden.

Understandably, the government is determined to avoid mistakes of the past. There were excesses in property investment in the boom times.

The easy availability of finance to inexperienced landlords led to an influx of speculators, many of whom did not consider the consequences of their commitment.

Regulation would not have prevented - and will not prevent - unwise investment decisions.

But when assessing applications for buying investment properties lenders must ensure buyers understand the market they are entering and have made provision for void periods, maintenance and tenants not paying their rent.

The affordability of many of the mortgages granted during the boom was based solely on the valuer’s opinion of the rent achievable and borrowers’ personal financial circumstances were not taken into account.

Everyone in the industry wants to see a stable and sustainable buy-to-let market. We want to see investors encouraged and protected. At the same time there’s no room for brokers who mislead the inexperienced by luring them with the false hope of a safe investment.

The FSA must strike a balance. We must not see a repeat of the errors of the past but the extra cost and inconvenience of too much bureaucracy risks discouraging vital investors.

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