In a previous article we reported how Lenders were filling their boots with Buy to Let mortgages and the adverse impact that this was having on First Time Buyers who were unable to compete because of affordability constraints. It hadn’t occurred to us that Quantitative Easing could have amplified these effects by beefing up BTL cash purchases as well. However, this is the scenario postulated by Standard and Poor. In a recent piece on QE and the effect it has had on driving wealth inequality in the UK they said:-
“…the share of cash-financed buy to let transactions appears to have started out pacing mortgage financed buy to let transactions at about the same time when QE was first deployed…..an increasing number of new additions to the rental market must have been financed by means other than mortgages, which we consider a good proxy for cash purchases. We think this points to the portfolio-rebalancing effect of QE, when investors liquidate lower yielding positions in their portfolio where yields have come under downward pressure due to QE (such as yields on government debt), in order to acquire higher-yielding assets from the proceeds. Higher demand for BTL property is likely to exert upward pressure on house prices.”
If this analysis is correct then this would explain why the Bank of England is increasingly concerned about the threat to financial stability posed by the BTL sector since if yields elsewhere become more attractive then it follows that there will be a flight of money away from bricks and mortar.