Are stringent lending measures in the buy-to-let market indicative of a potential recession?

Back in 2007, the global housing market was riding on the crest of wave while experiencing significant and seeming unstoppable growth. This came to a shuddering halt with the subprime mortgage collapse in the U.S, however, where reckless lending and borrowing triggered a raft of defaults and altered the nature of the market forever.

This led to the formation of the quick house sale market, while also forcing lenders to implement extremely stringent measures on applicants with a desire to borrow funds. While the markets has eased considerably as it has recovered, the portents for a further global recession in 2016 have forced the Bank of England (BoE) to consider implementing more robust measures in the buy-to-let marketplace.

According to Property Rescue, the BoE is considering making a raft of lending controls in a bid to consolidate the growth of the buy-to-let market and minimise damage in the event of a worldwide recession. While some believe that this simply a response to spiralling price points, rental premiums and relentless growth, others believe that a global economic collapse would hit the buy-to-let market hardest and trigger a catastrophic outcome.

In this regard, the actions of the BoE would appear to be more of a damage limitation exercise than a progressive economic plan. By restricting lending and managing growth, it could limit the losses that were made in the face of an economic collapse. This is undoubtedly a plan that has been made with the previous recession in mind, as the sheer impact of the 2008 collapse has created a legacy and sense of fear that remains tangible to this day.

While there is some logic in this approach, it may not be the best course of action given the fact that the extent of any potential recession cannot be determined at this stage. With the BoE’s latest Financial Stability Report also confirming that they buy-to-let market remains a central driver of the British property market (and the economy as a whole) an overly aggressive approach to regulating lending could damage the sector irreparably in the long-term.

In this regard, it may be pertinent for the BoE to think carefully before making any dramatic changes to the criteria for lending. This will have a huge impact on the future growth of the market and the economy as a whole.


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