Is buy-to-let a threat to the UK economy?

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Housing economists dispute the Bank of England’s belief the buy-to-let mortgage sector has become systemically important and a threat to the wider economy.

Last month the Bank of England said the buy-to-let sector is now large enough to be a possible danger to UK plc.

The Bank is worried an interest rate rise or financial downturn could tempt buy-to-let landlords to sell their properties in droves, accelerating any fall in house prices and having a knock-on impact on the wider financial system.

A BoE survey published in December found 15 per cent of buy-to-let investors would consider selling their properties if rental income stopped covering interest payments. A further 45 per cent said they would sell if house prices fell more than 10 per cent.

Speaking during a Treasury committee session in January, BoE governor Mark Carney said the market warranted “heightened scrutiny” .

Hometrack insight director Richard Donnell says the central bank is right to be concerned a rush of landlords selling up could have a knock-on effect.

He says: “If there was a big shock to the UK economy, they could just disappear, and some of them might want to sell.

“The question then is would that cause house price falls? And would that then affect how many homes are built and investment in new housing? Would it lead other people to try and sell their homes?”

But housing economists argue there are no signs this will ever happen.

Capital Economics chief property economist Ed Stansfield says: “I am a little more sceptical than most about the idea that all landlords are in it for a quick buck and at the first sign of trouble they will sell their properties and flood the market with homes nobody wants.

“That isn’t the way they have behaved in the past. Most of them dip in and out of the market at times and under conditions that suit them.”

Donnell says factors such as Chancellor George Osborne’s plans to raise stamp duty on second homes could decrease net buy-to-let investment, but existing landlords will not be fazed.

He says: “There are so many decisions driving behaviour, but I don’t see a mass exodus of investors from the market.”

But Stansfield says investors should be wary of the new political feeling towards their sector.

He says: “We’ve had big political change, and if I were a buy-to-let landlord I’d be pretty disgruntled at the tax changes the Chancellor is trying to push through. He hasn’t said so, but he’s sent a pretty clear message that he regards buy-to-let landlords as a social nuisance.

“Would you want to be investing in something where the politicians are gunning for you that much? Who knows what other tax changes the Chancellor has up his sleeve? What’s to stop him toughening up things like safety standards on boilers and maintenance requirements?

“You’re looking at a situation where you are increasingly being viewed as a cash cow by the Chancellor and I don’t think that’s a particularly healthy situation to be in.”

Mortgages for Business managing director David Whittaker says the Government should be wary of making more changes to a sector that has already seen great recent turbulence.

He says: “It would be worrying indeed if the Financial Policy Committee starts pulling some more levers before they see the outcomes of the current changes in hand. Some of those changes aren’t going to strike until 2020/21, when the higher-rate taxpayer loses a percentage of his revenue in tax.

“There is so much up in the air, it’s like juggling balls, and if they throw more balls into the mix then they risk dropping them all, but none will be any wiser after the event about what worked and what did not work.”

A Council of Mortgage Lenders spokesman says: “Our concern is about the cumulative effect of a range of measures that will have an effect on the buy-to-let sector, and there could be knock-on consequences for tenants. We had the announcement of a series of reductions in what landlords will be able to set aside against tax in the future. Then, of course, there is the prospect of macro prudential measures targeted at the buy-to-let sector that may be used to address concerns within the sector.”