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4 things you need to know about the BoE’s views on the property market

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  • 01/12/2016
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4 things you need to know about the BoE’s views on the property market
The Bank of England’s latest Financial Stability Report was somewhat overshadowed by the news that RBS had failed the Bank’s stress tests.

However, the report includes a number of important observations on what it believes the future holds for the UK property market.

1) Outlook for housing market is “highly uncertain”

The Bank of England sounded a note of caution in the report, warning that the housing market faces a “highly uncertain” future.

It commented that the housing market had softened in recent months, in part due to the additional Stamp Duty on second homes which had pushed transactions forward at the start of the year. But while the majority of respondents to the latest Royal Institution of Chartered Surveyors said they expected further house price rises, the Bank of England is evidently not quite as confident.

Daniel Hegarty, CEO and founder of digital mortgage broker habito, said: “We’re in for a bumpy few years as the market finds its feet again, so now is not the time to bury our heads in the sand or borrow beyond our means. Consumers need to take greater control of personal finances, seek alternatives to traditional methods and demand transparency from their financial service providers  – especially when it comes to the biggest financial commitment most of us will ever make.”

2) The Bank is watching the buy-to-let market

The report makes clear that the bank’s Financial Policy Committee is keeping a close eye on the buy-to-let market.

It highlighted how the market had “steadily expanded” over the past 15 years, with the stock of outstanding buy-to-let loans growing from less than £10bn in 2000 to more than £220bn today.

The Bank also noted that while transactions have slowed, there is “no evidence of a widespread sell-off by investors associated with the softening of the market”.

With the new underwriting standards from the Prudential Regulation Authority on the horizon, the buy-to-let market is clearly on notice from the regulators.

Brian Lawson, senior consultant at analyst IHS Markit, said: “An obvious area of risk would be imprudent property lending, which banks have shown capacity and willingness to undertake several  times in prior cycles.  This time around, the Bank of England is clearly oriented towards preventing problems before they arise, rather than moving in reaction to major difficulties.”

3) It is ready to act if it believes underwriting standards slip

Back in 2014 the FPC put in place two key measures:

  • Lenders cannot lend more than 15% of their total number of loans at income ratios of more than 4.5.
  • Lenders are required to conduct tough stress tests on would-be borrowers.

Both of these measures are being continued, as the Bank argues that they “provide insurance against a future deterioration in underwriting standards”.

The FPC believes they have only had a “modest” effect on lending to date.

4) Tough times ahead for commercial property

The Bank of England believes there may be further trouble ahead for the commercial property sector. It noted that valuations in some segments remain stretched, such as London offices, where prices are elevated relative to rents and could be in line for further correction.

It warned that price adjustments could also be driven by the actions of foreign investors. Overseas investment has accounted for half of commercial transactions since 2012 but has fallen sharply this year due to uncertainty over our relationship with the EU. While the fall in the value of sterling may attract some overseas investors, the volatility may put others off.

The Bank also emphasised that the “underlying vulnerability” of open-ended funds remains. Future shocks to the commercial market could result in further redemptions and suspensions, as we saw in the aftermath of the Brexit vote.

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