BoE launches buy-to-let curbs as housing market cools

As its data showed the UK housing market cooled in August with a 20-month low in mortgage approvals, the Bank of England announced new curbs on buy-to-let borrowing.

Mortgage approvals continued their recent decline, falling to 60,058 in August from 60,925 in July - not quite as much as the consensus forecast of 59,800 but down over 17% from the peak of over 73,000 in January.

However, the BoE data dump also showed a fairly strong rise in lending to companies and in unsecured consumer credit.

Last month consumer credit lending rose to £1.6bn after the dip to an 11-month low of £1.2bn in July.

Annual growth in lending to corporates also picked up to 4.0% in August from 3.8% in July, contributing to an increase in the MPC’s preferred measure of bank lending to 6.6% from 6.5%.

And, even though some property investors have already called the death of the buy-to-let market, the BoE's Prudential Regulation Authority (PRA) also on Thursday launched a series of affordability checks and interest rate “stress tests” that will be introduced from January 2017.

Buy-to-let lenders will need to verify that landlords can afford to pay the mortgage under potential future interest rates of 5.5% and the PRA recommended that the interest coverage ratio, a commonly used measure of the ratio of rental income to mortgage payments, does not fall below 125%.

Affordability assessments will need to take into account borrower’s costs, personal income and possible future interest rate increases, with lending to portfolio landlords to be assessed using a specialist underwriting process.

"The PRA’s actions are intended to bring all lenders up to prevailing market standards and guard against any slipping of underwriting standards during a period in which firms’ growth plans could be challenged by the changing economic landscape and the impact of forthcoming tax changes,” it said.

The BoE data suggested the housing market continues to cool but that appetite for debt hasn’t taken much of a hit, said Capital Economics' Scott Bowman, though he noted the RICS survey of new buyer enquiries picked up sharply in August, implying the cooling trend will not last too much longer.

On consumer lending, economist Howard Archer of IHS Markit said: "Consumers were clearly prepared to continue borrowing and spending in August, and it is notable that confidence has recovered markedly after slumping in July in the immediate aftermath of the Brexit vote.

"We suspect that the fundamentals for consumers will become less favourable over the coming months with purchasing power likely diminishing and the labour market softening. On the one hand, this may make people more cautious over borrowing, but on the other hand, it may increase the need for some people to borrow."