Landlords selling up could cause house prices to crash - Bank of England

The Bank of England (BoE) has raised red warning flags over the potential consequences of rising buy-to-let mortgage rates - because landlords may decide to sell up in such numbers that house prices will crash.

The bank also fears that a sell-off would lead to higher rents for tenants.

In its latest Financial Stability Report, the BoE is predicting that by the end of 2025, the average increase in buy-to-let mortgage repayments will be £275.

This could significantly impact landlords, potentially forcing them to pass on the added costs to their tenants or take a financial hit themselves.

Not meeting the interest coverage ratio

There's a worry in the report over the potential surge in borrowers not meeting the interest coverage ratio (ICR) below 125%.

At the end of last year, the proportion stood at a modest 3% but the BoE predicts that by 2025, this figure could rocket to a staggering 40%.

This would imply that a significant proportion of landlords might find their rental income will not cover their higher mortgage expenses.

And that could leave landlords with little choice but to increase rents or consider selling their properties - and precipitate a house price crash.

'Putting responsible landlords in an impossible position'

The chief executive of the National Residential Landlords Association (NRLA), Ben Beadle, said: "Growing mortgage costs are putting responsible landlords in an impossible position.

"Either they leave the market at a time when demand for rented housing is already outstripping supply, increase rents, or soak up growing costs which many simply cannot afford.

"Whilst help has been provided for homeowners in the form of the Government's Mortgage Charter, nothing has been done to support the private rented sector."

He adds: "It is vital that ministers step in to protect the market from the impact of growing costs.

"For renters, housing benefit rates need to be unfrozen without delay to ensure they can cover their rent payments.

"Alongside this, tax hikes on the sector need to be scrapped to boost the supply of homes to rent that tenants desperately need."

Renters' affordability will be affected

The BoE is also warning that renters' affordability will be affected by rising interest rates and rents, after rents rose by 5% in May.

The bank says that renter households tend to have lower incomes and little savings and so would be deeply affected if rents rose quickly.

Not only would they be unable to pay higher rents, but they don't have the financial resources to help do so and would have to rely on credit - and then struggle to pay that debt off.

Profitability being hit by higher interest rates

The BoE report also warns that landlords are seeing profitability being hit by higher interest rates and changes to income and capital gains tax rules.

The proposed changes under the Renters (Reform) Bill and the costs to meet energy efficiency regulations might also affect a landlord's profits.

The Bank's report says: "Falling profitability could, in principle, cause landlords to sell their property investments and exit the BTL market.

"If this were to happen in large enough volumes, it could put downward pressure on house prices."

'Landlords will be worried'

Simon Thompson, the managing director of Accommodation for Students, said: "The Bank of England's report makes for interesting reading - and landlords will be worried.

"Rising interest rates will affect those remortgaging but there are other costs facing the private rented sector too, including the upgrading of a property's EPC rating."

He added: "I've said before the government needs to step in and help private landlords because there will be a serious housing problem if lots do decide to sell.

"The first thing to do is to resolve the tax situation to encourage investment, especially section 24, which would do a lot to help landlords and tenants."

More info: The BoE’s report can be downloaded from its website.