The Bank of England has cautioned that Britain's booming buy-to-let market could post a threat to the economy.
The bank's biannual Financial Stability Report warned that looser lending standards in the buy-to-let industry "could contribute to general house price increases and a broader increase in household indebtedness", as investors find it easier to access credit for investing in rental property.
In a downturn, investors selling buy-to-let homes could also amplify falls, warns the report, "potentially raising losses given default for all mortgages".
The report follows a continuing boom for the private rented sector, as landlords enjoy rising rents and strong demand from tenants. Indeed, UK renters now pay the highest fees in the EU, according to the National Housing Federation, whose report (based on stats from Eurostat) found that tenants in the UK pay a monthly average of â¬902, almost double the European average of â¬481.
Private rents in the UK are around 50 per cent higher than in Germany (â¬600) and the Netherlands (â¬625), both countries known for their sizeable rental market. Private rented households in the UK now spend almost 40 per cent of their income on rent, compared to the European average of 28 per cent.
The strength of the buy-to-let market is fuelled by rising demand, as well as the ongoing shortage in supply. According to Countrywide, landlords are now frequently letting out properties to new tenants while existing renters are still in place. In London, over half (51 per cent) of new lets are agreed while there is still a sitting tenant, up from 41 per cent in 2014.
The sector has been boosted in recent months, thanks to the UK's new pension laws, which allow savers to draw their entire pot of cash after the age of 55, which many experts expect to have been invested into buy-to-let property.
In April 2015, lending to first time buyers fell 8 per cent year-on-year, according to the Council of Mortgage Lenders. Lending to home-movers and remortgagers also fell 8 per cent and 2 per cent respectively. Lending to buy-to-let investors, though, climbed 22 per cent year-on-year.
But John Heron, Director of the Intermediary Mortgage Lenders Association (IMLA), warns against a "rush to judgement" on the buy-to-let market.
"The Bank of Englandâs comments on BTL are based on their observation of strong growth in lending in recent years. It should be understood, however, that while there has been substantial growth, this has been from a low base post-crisis and lending today is still no greater than it was 10 years ago and is well below the levels achieved before the crisis in 2007," he comments.
"The rising cost of homeownership is among many factors driving demand for rental properties, including the fall in social housing, changing work patterns, growing numbers of students, high levels of immigration, later marriage and rising separation rates. Housing needs are changing â and in fact, IMLA analysis shows fewer than one in three extra properties to enter the private rental sector since 2007 have been backed by a BTL mortgage."
"Lending has therefore been responding to rather than leading demand," he adds. "Increased competition is also having a markedly lower impact in BTL than the residential mortgage market. Despite the increase in higher loan to value (LTV) products, few go above 80% LTV compared to a pre-crisis norm of 85% LTV. These 80%-plus products also have a very small share of the marketplace, with the Council of Mortgage Lenders (CML) estimating that they account for less than 1% of lending. Lenders have been quick to adopt the CMLâs BTL Statement of Practice, and have tightened much of their lending criteria â particularly where LTVs are concerned."
"We look forward to an open and frank debate on BTL growth but strongly urge against a rush to judgement," he concludes.