Britain's cooling measures to hit property price growth

The Bank of England’s move to tighten mortgage lending criteria will act as a drag on price growth in parts of the British market where home prices have been surging to unaffordable levels, property consultants say.

The BOE on Thursday launched measures aimed at cooling the housing boom, including a cap on lending for home loans.

The bank’s Financial Policy Committee recommended that property loans of 4.5 times a borrower’s income or higher should comprise no more than 15 per cent of new mortgages, with effect from October.

The committee added in a key report that banks should apply a stress test to determine that borrowers can afford mortgage repayments, should the central bank’s main lending rate climb by 3 percentage points.

Liam Bailey, a global head of research at Knight Frank, said the BOE was signalling that as the economy began to recover it needed to start planning for the eventual rise in interest rates.

“As house prices have been rising, risks are obviously increasing that mortgage repayments will not be as affordable in say two to three years’ time as rates rise,” Bailey said.

The central bank has held its key interest rate at a record low of 0.5 per cent since March 2009, as it sought to stimulate and strengthen Britain’s economic recovery.

The BOE’s benchmark rate influences what retail banks charge customers for home loans.

Bailey said the measures would help to curb what might be termed loose lending by banks.

Lucian Cook, Savills UK head of residential research, said: “Further stress testing of affordability at different interest rate scenarios is likely to have the most significant impact on the market.

“It should prevent the mortgaged housing market getting into dangerous territory and will act as a drag on price growth in that part of the market.”

This view was echoed by residential fund London Central Portfolio. 

“The new restrictions will have a much more punitive effect in the southeast, with almost half the market becoming unaffordable, rising to 70 per cent in the domestic part of Greater London,” said Lauren Awcock, the fund’s investment manager.

According to Knight Frank, Greater London saw an annual rate of price growth of 18.5 per cent in May. Bailey said: “We think that the rate of growth will slow, but there is scope for say 5 per cent additional growth between now and the end of 2014.”