Are lenders calling a top to UK house prices?

With prospective buyers still outnumbering sellers, prices have been rising by around 1% every month. It now looks like the banks might be the first to blink and step on the brakes.

Despite the recent slight increase of new supply coming to market, estate agents report 3 buyers for every property on their books, driving prices ever higher.

There has to come a point when lenders' risk appetite becomes stretched. It may have arrived.

Reduced overall mortgage lending

The Bank of England's Q1 Credit Conditions Survey showed that banks expect their total mortgage lending to reduce in Q2, the first time since the early months of the pandemic.

Mortgage lending is critical to the health of the housing market. Mortgage approvals data are a key leading indicator for the housing market. If the reduction in mortgage supply is sustained, it would certainly represent the dab on the brakes that many buyers have been hoping for.

Tightening affordability criteria

According to Ray Boulger, a senior analyst at broker John Charcol, "This is arguably the biggest tightening in mortgage lending since 2009".

Many banks rely on household spending figures from the Office of National Statistics when calculating mortgage applicants' ability to meet the repayments. The most recent ONS update takes account of general household inflation and will soon include the substantial rise in energy costs.

They will also take into account the higher interest rates and the National Insurance rise. The result will be a reduction in the amount that individuals will be able to borrow in the coming months.

Santander were the first to notify mortgage brokers of an update to their affordability model and are expected to be followed by all of the major lenders.

According to Russell Galley of Halifax, “Buyers are dealing with the prospect of higher interest rates and a higher cost of living. With affordability metrics already extremely stretched, these factors should lead to a slowdown in house price inflation over the next year.”