Housing market observers are keeping a close eye on the effects and the Bank of England has said it hopes there will be less of the some of the extreme lending that has taken place over the last 18 months that has given rise to warnings about a property bubble developing, particularly in London and the South East.
Concerns have been voiced that some of the higher loan to income multiples among first time buyers in London and the South East could cause concern in the event of interest rates rising.
But the government is keen that its housing led recovery continues and spurs on the wider economy in the run up to the general election next year.
Lenders have claimed that they were already operating under the new rules prior to their introduction on 26 April. If this is the case then it appears unlikely that we will see a significant slowdown in mortgage lending in the coming months, according to Neil Hudson of Savills research.
He believes that possibly of greater importance is the Bank of England’s Financial Policy Committee (FPC) power to set tougher interest rate stress tests on new borrowers. ‘The FPC is likely to get these powers in the summer and it may be during this period that we begin to see prospective borrowers struggle to get financing,’ he explained.
‘Given the importance of first time buyers in the recent surge of market activity, any limit on their ability to borrow relative to current trends could lead to a slowdown in both house price growth and overall transaction levels,’ he explained.
‘Unfortunately, this would also lead to prospective first time buyers remaining trapped in the private rented sector. Therefore, any move by the Bank of England to minimise threats to financial stability via the housing market should also be met by support from the government for the private rented sector,’ he added.
Cash buyers could have a significant role in keeping the housing market recovery going if there is a slowdown in lending. Since the credit crunch, cash buyers have played an important role in driving market activity. With over 400,000 cash only transactions during the last 12 months, these are not just foreign investors in new build or cash rich buy to let landlords. According to Savills they are just as likely to be downsizers and home movers and have probably begun to replace mortgage home movers in some markets.
‘At a fairly constant 35% of total market transactions, even during the last year, the scale of cash buyer activity will dilute any intervention in the market by the Bank of England but should not prevent that intervention,’ said Hudson.
But some lenders have already been taking action to curb higher loans. Lloyds Banking Group, which provides mortgages through the Halifax, Lloyds Bank, the Bank of Scotland and Scottish Widows Bank, has announced a change to its policy for new high value mortgage lending.
From today, where the mortgage lending on a property in the UK is over £500,000, the Group will assess the mortgage application by applying an income multiple limit of four. It described this as ‘a targeted policy change’ primarily designed to address specific inflationary pressures in the London housing market.
‘Whilst the housing market outside of London is starting to improve, the recovery is fragile and prices largely remain below their peak. It is important we don't disrupt this recovery,’ said Stephen Noakes, Group director of Mortgages.
‘But in London, house prices are almost now 30% above the 2007 peak. This is largely driven by issues of supply which are particularly acute in London and this is having an impact on income multiples which are failing to keep pace with asset growth,’ he pointed out.
‘We're not seeing such issues across the rest of the UK and therefore this is a targeted response to an issue largely in the upper tiers of the London housing market. This prudent update to our lending policies is intended to manage risks to our business and for our customers,’ he added.
He explained that the Group continues to support the Help to Buy mortgage guarantee scheme as it has raised confidence in the housing market particularly outside of London. ‘Help to Buy is not one of the factors driving London house prices.
Just 2% of purchases in London in 2014 have been through the scheme with the significant majority of applications coming from the rest of the UK,’ said Noakes, adding that the Group expects this policy change to impact around 8% of its lending in London.
