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London Property Market 05 April 2016

Tightening buy to let lending could squeeze renters still further

New restrictions on buy-to-let lending signalled today by the Bank of England will do nothing to help first-time buyers on to the property ladder and could actually see rents rise even more steeply if landlords are deterred from buying properties or decide their business models are no longer viable in light of recent legislation and tax changes, warns London estate and letting agent Chestertons.

The Bank's Prudential Regulation Authority (PRA) this morning [29 March] reported that action was required to ensure lenders' "underwriting standards did not slip" and to prevent a bubble in the sector fuelled by investment from smaller landlords in particular, who may be more susceptible to falling into arrears if and when interest rates start to rise. The PRA claimed that without constraints, lenders expect a gross increase of 20 per cent in buy-to-let borrowing over the next two to three years; and warned lenders should start to take into account how much cash borrowers have to cover their interest payments in a worst case scenario of interest rates rising to 5.5 per cent for a five-year period. The authority said this should ultimately see buy to let mortgage approvals fall by between 10 and 20 per cent by 2019.

But the changes will do little to help first-time buyers, as demand for homes to buy is still outstripping supply and prices are continuing to rise steeply as a result. More new homes are needed, and any attempt to shrink the private rental market will only succeed in raising rents, making saving for a deposit even more difficult for many first-time buyers currently renting.

Nick Barnes, Head of Research at Chestertons, comments: "It's fair to say that the supply of new homes to the market, though rising in some parts of London, remains insufficient – all of which meaning that gaining the first rung of the housing ladder in London is just as tough as it's ever been. The recent flurry of second home and buy-to-let purchases was a direct result of the 3% stamp duty surcharge coming in from 1st April, but there is still huge pent-up demand from owner-occupiers, who in many cases have been biding their time waiting for the investor frenzy to die down."

Henry Knight, Managing Director of Springtide Capital, an independent mortgage broker, adds: "George Osborne and the PRA have been talking about increased stress tests in the buy-to-let market and this is exactly what we are seeing in this consultation document. There's a clear policy agenda, which is to restrict the buy-to-let market in order to prevent investors taking potential first-time buyers' properties.

"While the theory behind this is understandable, the Government still needs to do more to ensure the availability of property is improved to ensure the majority of first-time buyers have something to buy that they can actually afford. If ministers ignore issues restricting the supply of new homes to buy while also making it too difficult for landlords to buy new properties, the result will be increased rental costs due to a lack of properties to rent in certain in-demand towns and cities, especially London."