Fitch Ratings, the international ratings agency, said that demand for private rental property would outweigh the immediate impact of changes to buy-to-let landlord tax treatment in the near future. However, it added that the Prudential Regulation Authority’s plans to implement underwriting guidelines across the sector could change this in the longer term.
Last week’s proposals mooted by the Bank of England’s regulatory arm includes affordability tests that would force lenders to place a minimum interest rate stress of 5.5% on buy-to-let deals, while carrying out an assessment of landlords’ letting costs and tax liabilities.
Fitch said: “The proposal does not set limits on loan-to-value, debt-to-income, or interest coverage ratios. If these were adopted, this could make buy to let less attractive for landlords if rental yields do not rise sufficiently to offset the impact of such affordability rules. This could have a knock-on impact on buy-to-let lending volumes and RMBS [residential mortgage backed securities] prepayment rates.”
The ratings agency said a fall in migration is another longer-term risk if a Brexit occurred following the EU referendum in June.
In the nearer-term, Fitch was more positive and said “fundamental conditions” would support performance in the sector in 2016-2017.
“Government initiatives to support homeownership and boost housing supply will take time to bear fruit, and we forecast UK house prices to rise by 4%-5% this year,” it said.
“Demand will keep rental yields attractive even as property prices rise, and give affected landlords the option of raising rents, rather than forcing them out of the market. If the tax changes discourage new buy-to-let entrants, this could be another constraint on availability that supports higher rents.”
Fitch pointed out that performance in the buy-to-let sector has been strong with arrears not dissimilar to residential mortgage-backed securities that it has rated in the prime UK market. One-month-plus arrears for buy-to-let loans stood at 2.43% in January, compared with 2.35% for prime transactions.