Regulatory tidiness doesn’t always improve matters, as recent debates about the buy-to-let market have illustrated only too clearly.
The argument for regulation seems to revolve around the notion that it would be better for everyone if all financial markets were regulated.
After all, if a market is regulated then consumers will be better protected, which will instill confidence and encourage more market participants.
This may hold true for savings, investments and even standard residential mortgages, but I’m not convinced it’s an argument that holds water in the buy-to-let market.
Why?
Because the buy-to-let market is not for consumers; it’s for professional investors. Investors may own one or a hundred properties, but the rationale for ownership is the same: they’re assets which generate an income.
Much like a piece of plant or machinery.
That income generating ability is all important because financial institutions’ decision to lend is based on the level of income the asset will produce, rather than the borrower’s ability to afford their mortgage repayments.
The borrower’s personal income is irrelevant; its the income producing ability of the asset that matters most.
Why is this distinction so important?
Because with a residential mortgage, the risk to the borrower lies primarily in their inability to be able to afford their mortgage repayments in the future. There is, therefore, a lot of emphasis placed on affordability at the loan approval stage.
However, with buy-to-let mortgages the risks are altogether different. The risk lies in the type of property being purchased and its ability to generate income in the future, which will be determined by factors such as location and tenant demand.
No amount of regulation can protect investors against the risk of buying the wrong type of rental property. That’s down to commercial acumen, knowledge and experience.
What regulation will do, however, is increase costs and possibly reduce competition, if some smaller lenders decide that the additional burden of regulation is more effort than it’s worth.
It may also dissuade new lenders from entering this market in the future.
I don’t see any evidence that the buy-to-let market needs regulating.
I’m not aware of large numbers of (or indeed any) buy-to-let borrowers who have been disadvantaged because of a lack of regulatory protection. There isn’t a problem that needs to be addressed; the market works just fine as it is.
I was therefore gladdened to hear that amendments have been made to the European Mortgage Directive which may mean that regulation of the buy-to-let market may not be necessary after all.
I haven’t yet seen any details, but let’s hope the rumours are correct.
Tidiness for the sake of it, especially when it comes to regulation, runs the risk of unintended consequences.
And at a time when so many markets, including the buy-to-let market, remain in a fragile state, that’s something we could all do without.
