David Smith, partner and head of operations at Anthony Gold Solicitors, examines and assesses the possible impact on the buy-to-let market if the Financial Conduct Authority (FCA) decides to intervene in regulating smaller and non-bank lenders.
Why is the FCA considering intervening in the buy-to-let market?
The Bank of England has already expressed concern that the buy-to-let market is as buoyant as it was prior to the 2008 crash and that lending is at a similar level as it was then. It has suggested it might, through the Prudential Regulation Authority (PRA) apply some degree of regulation to bank lending and has consulted on whether it should do so. However, the lending market has diversified in the meantime, partly as a response to the crash as well, and some smaller and non-bank lenders fall outside the remit of the PRA and within that of the FCA. The FCA is considering whether a similar element of regulation should now be applied to these other lenders.
What does this mean for one of the fastest-growing areas of the housing market?
It could have no effect at all. Although the PRA has suggested that it will regulate buy-to-let lending, this will only be to ensure that an appropriate set of risk criteria is used when assessing borrowers and that there are no lax standards being applied in this sector. In other words, the PRA will want to be sure that proper stress tests are being applied and that a rise in interest rates or softening in the rental market will not lead to a wave of mortgage defaults. However, this may not be terribly relevant because banks have generally learnt lessons from the crash and there is no strong evidence of lax standards in buy-to-let lending. Indeed, some banks have further tightened their lending criteria this year.
Lenders that fall outside the FCA remit may be prepared to lend where banks are not. However, this does not necessarily mean that they apply lax standards but more that they assess risk differently. Smaller lenders are themselves conscious of the risks that they are running and are fully aware that there is no prospect of a state-sponsored rescue if they make a mistake and so they are generally fairly careful with lending. At the moment the FCA is proposing to monitor the situation and gather evidence—it is possible that it may not find any or may consider that what it finds does not warrant further regulation. At this stage, lenders will probably review their criteria and some may apply a more restrictive policy but until the FCA starts to indicate what it is finding, there is unlikely to be any drastic change.
It is also worth noting that while lending has returned to previous levels, landlords are generally much less highly geared and there are many more landlords with little or no debt-financing than there were before.
Is there a risk that buy-to-let lenders not supervised by the PRA could sanction poorer lending standards?
There is always a risk of poor lending criteria. However, buy-to-let lending, even within entities regulated by the PRA has generally fallen outside the PRA’s controls and so there is no real difference between PRA and non-PRA regulated entities at the moment. It is an area which the PRA and FCA will wish to keep a close eye on as in retrospect it was in the buy-to-let market that some of the first signs of the collapse could be seen in 2008, and it was also that sector which helped to spread the damage further. Additionally, landlords who are unable to pay mortgages often own more than one property and so they are force multipliers in that their collapse leads to multiple families being left homeless with the resultant increased economic damage that it causes.
Are there any other risks to the buy-to-let market?
The main risks to the buy-to-let market come from central and devolved governments. Landlords face increased income tax cost as relief for mortgage interest payments is phased out and will also be required to pay more in stamp duty land tax on their property purchases. There are also increased regulatory requirements which bring new and increased expenses and the forthcoming requirement to ensure that properties meet a minimum energy efficiency level which will require substantial investment in some properties. All of these will increase landlord costs and they may not be able to cover all of these through increased rent if the market will not bear those rent levels.
Interviewed by Susan Ghaiwal. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.