Much has been written about the buy-to-let sector and its role in encouraging both high levels of leverage and increases in house prices. Now Oxford Mathematician Doyne Farmer and colleagues from the Institute for New Economic Thinking at the Oxford Martin School and the Bank of England have modelled that impact. By looking at a large selection of micro-data, mostly from household surveys and housing market data sources, the team were able to model the individual behaviour and interactions of first-time buyers, home owners, buy-to-let investors, and renters from the bottom up, and observe the resulting aggregate dynamics in the property and credit markets. In turn a series of comparative statics exercises investigated the impact of the size of the rental/buy-to-let sector and different types of buy-to-let investors on housing booms and busts.
The results suggest that an increase in the size of the buy-to-let sector may amplify both house price cycles and increase house price volatility. Furthermore, in an effort to illustrate how this might be mitigated at a macro prudential level, the team modelled a loan-to-income portfolio limit which, encouragingly for policy-makers, attenuates the house price cycle.