Part A: UK property markets

Chart A.23 Mortgage lending growth has been driven by buy-to-let lending Change in outstanding lending to individuals secured on dwellings,by borrower type (a)(b) Sources: Bank of England, Council of Mortgage Lenders and Bank calculations. (a)Data are not seasonally adjusted. (b)Movements in amounts outstanding can reflect breaks in data series (such as changes in methodology, population changes, write-offs and transfers) as well as underlying flows. (c)Semi-annual data are interpolated pre (d)Bars show contributions to growth in total outstanding lending to individuals secured on dwellings. (e) Lending to owner-occupiers is calculated as outstanding lending to individuals secured on dwellings less outstanding lending secured on buy-to-let properties. (f) The 2015 lending data assume that the growth rates in Q4 are the same as in Q3.

Chart A.24 UK house price inflation has picked up House price growth and forward-looking indicators (a) Sources: Halifax, Nationwide, Royal Institution of Chartered Surveyors (RICS) and Bank calculations. (a)RICS series adjusted to have the same mean and variance as the houses price series.

Chart A.25 The flow of buy-to-let lending is near its pre-crisis peak Gross advances of buy-to-let lending, split by purpose (a) Sources: Council of Mortgage Lenders and Bank calculations. (a)Sterling. Non-seasonally adjusted annual data. There is a step change in 2005 H1 as a large lender submitted buy-to-let data to the Council of Mortgage Lenders for the first time. (b)This category includes other lending and further advances. (c)The 2015 data assume that the growth rates in Q4 are the same as in Q3.

Chart A.26 Buy-to-let lending appears more sensitive to interest rate rises Borrowers vulnerable to interest rate rises Sources: Council of Mortgage Lenders Buy-to-let Mortgage Survey, FCA Product Sales Data and Bank calculations. (a)Per cent of buy-to-let mortgages originated over the five quarters to 2015 Q1 for which interest payments would exceed 125% of rental income for a given rise in mortgage interest rates. (b)Per cent of owner-occupier mortgages originated over the five quarters to 2015 Q1 for which interest payments would exceed 40% of household income for a given rise in mortgage interest rates. (c)The FCA Product Sales Data include regulated mortgage contracts only, and therefore exclude other regulated home finance products such as home purchase plans and home reversions, and unregulated products such as second charge lending and buy-to-let mortgages. (d)Includes all owner-occupier mortgages for house purchase and re-mortgages with an increase in principal.

Table A.27 Credit risk on buy-to-let lending has been higher in recent years Quarterly possessions and write-offs on mortgage lending Sources: Bank of England and Council of Mortgage Lenders. (a)The possession rate is the number of properties taken into possession per quarter as a per cent of outstanding mortgage loans at the start of the quarter. (b)The write-off rate is the value of loans written-off per quarter as a per cent of the mortgage stock at the start of the quarter. (c)This series covers all mortgage lending regulated by the Mortgage Conduct of Business rules implemented after 31 October (d)This series covers ‘unregulated mortgage lending’. In % of this was buy-to-let, with the remainder including second-charge mortgage lending and lending that took place before the implementation of the Mortgage Conduct of Business rules.

Chart A.28 Prices have risen strongly in recent years UK commercial real estate prices Sources: MSCI and Bank calculations.

Chart A.29 Rental yields have been falling Commercial real estate rental yields and government bond yields in the United Kingdom Sources: Bloomberg, MSCI and Bank calculations.

Chart A.30 An investment valuation approach indicates some parts of the CRE market are overvalued Extent of under/overvaluation of commercial real estate prices in the United Kingdom (a) Sources: Association of Real Estate Funds (AREF), Bloomberg, Investment Property Forum, MSCI and Bank calculations. (a) Investment valuations are based on assuming property is held for five years with the cash flows from the rent and sale discounted. It is assumed that the property is sold at a rental yield (in line with long-run averages fifteen years). The sale proceeds and rental income are discounted by the ten-year gilt yield plus a risk premium. The swathe represents varying assumptions on the average through the cycle risk premium, given the inherent uncertainty in measuring it; the lower end of the range is from a survey of investors from AREF and the higher end is a risk premium derived from the long-run relationship between gilt yields and property yields. For more details see Crosby, N and Hughes, C (2011), ‘The basis of valuations for secured commercial property lending in the UK’, Journal or European Real Estate Research, Vol. 4, No. 3, pages 225–42. Bank Confidential

Chart A.31 Use of leverage by investors in London has increased Investment in London by use of leverage (a) Sources: The Property Archive and Bank calculations. (a) The Property Archive data of investors has been mapped to the use of leverage based on the business model of investors. For instance, pension funds are mapped to unleveraged, real estate investment trusts to somewhat leveraged, and private equity to highly leveraged.

Chart A.32 Strong growth in assets under management of commercial real estate open-ended funds continues Assets under management in open-ended funds investing in commercial real estate Source: The Investment Association.