Stamp duty increase will reduce risk of house prices crashing
Price crash rating agency Moody’s believes that the increased regulation of mortgages is not only positive for the UK banking system but will also limit the risk of a sharp fall in house prices once interest rates rise.
Moody’s said that recent measures to cool the buy-to-let mortgage market will support the creditworthiness of the UK banking system by helping to ensure robust lending standards.
Riccardo Rinaldini, an analyst at Moody’s, said: “Once implemented, the UK government’s tax and stamp duty initiatives should help to temper the growth of the buy-to-let sector. This should reduce the tail risk of a sharp decline in house prices from a concentrated market sell-off when interest rates eventually rise.”
While the current favourable economic environment has helped keep buy-to-let mortgage arrears low, the sector could negatively affect UK banks if things change, Moody’s said.
“We consider buy-to-let mortgages to be inherently riskier than owner-occupied mortgages. If borrowing costs rise and rental income no longer covers landlords’ interest payments, a broad based sell-off of buy-to-let properties could fuel a fall in house prices, negatively affecting all banks and building societies in the UK,” said Rinaldini.
The 3% increase on stamp duty is set to take effect from 1 April as part of the government’s attempt to curb the buy-to-let market and free up property for first-time buyers. The basic rate of tax relief landlords can claim on properties is also set to fall to 20% from April 2017.
Greg Davies, assistant vice president in structured finance at Moody’s, said: “The Treasury’s Autumn Statement announcements have cost implications that will hamper growth in the buy-to-let market. These cost implications could deter new borrowers from entering the market, thereby dampening the demand for buy-to-let loans in the medium term.
“However, securitised transactions backed by buy-to-let mortgages will benefit from the UK’s stable housing market and strong underwriting criteria. Therefore, the decrease in buy-to-let loan origination will not have a negative impact on the performance of transactions backed by buy-to-let mortgage loans.”
The volume of outstanding buy-to-let mortgages in the UK has more than doubled from £85 billion in 2007 to £176 billion in 2015.
Interest rates are currently at a record low of 0.5%, where they have been since 2009. Many commentators forecast they will remain at this level well into 2017.
The Bank of England said it would monitor developments in buy-to-let activity in December, but did not announce any new measures to curb mortgage approvals.
It has previously expressed fears that the buy-to-let market was a potential threat to the UK’s economic recovery. There have been concerns that buy-to-let borrowers could be exposed following a downturn, which could hit the wider housing market and economy.