Fitch: Government changes could harm B2L

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The Government’s interventions in the buy-to-let market could eventually hurt the sector, according to Fitch Ratings.

The rating agency says that tenant demand will keep the market strong over the next one to two years.

But it adds that this could change over the medium term, especially if financial regulators bring in more rules around buy-to-let underwriting criteria.

Last week the Prudential Regulation Authority mooted such rules.

A Fitch note says: “Tenant demand for private rented property, which is a fundamental driver of BTL performance, has kept rents rising as housing demand outstrips supply.

“Real wage increases have enabled tenants to afford rent increases, but have not kept pace with house prices, keeping private rental demand high.”

The Office of National Statistics’ latest index found that rents rose 2.6 per cent in the 12 months to February.

Fitch says landlords’ behaviour will be changed by the new higher rate of stamp duty on second properties and the start of the gradual reduction in tax relief from 2017.

The note says: “Industry surveys suggest that existing landlords are less likely to add new properties when the tax changes take effect, and some may look to sell.”

But the rating agency adds that the buy-to-let market will be boosted by the Government promoting home ownership and increasing housing stock.

But Fitch says government action will have a bigger impact over the long term.

The note says: “Last week’s Bank of England proposal on BTL underwriting standards includes affordability tests that would incorporate a minimum interest rate stress to 5.5 per cent and an assessment of landlords’ letting costs and tax liabilities, including the announced changes to mortgage tax relief.

“The BoE said that this could restrict mortgage availability and/or profitability for some landlords, but that the BTL market would continue growing after implementation.”

But Fitch says the Bank’s document did not set limits on loan-to-value, debt-to-income, or interest coverage ratios.

The note says: “If these were adopted, this could make BTL less attractive for landlords if rental yields do not rise sufficiently to offset the impact of such affordability rules. This could have a knock-on impact on BTL lending volumes and RMBS prepayment rates.”