March was a bumper month for the mortgage market, with borrowing 64% higher than a year earlier, according to the British Bankers’ Association. Gross mortgage borrowing of £17.1bn was the highest figure since April 2008, before the financial crisis.

Buy-to-let blow

Everybody knew the reason why. This was a one-off surge as buy-to-let investors and second-home buyers rushed to beat Chancellor George Osborne’s 3% stamp duty surcharge, which came into force on 1 April. The Chancellor will direct further blows at buy-to-let, reducing wear-and-tear allowances for landlords, and from April next year, phasing out higher rate tax relief on mortgage interest repayments.

The impact of the new tax was immediate: gross mortgage lending fell 29% in April compared to March, this week’s figures from the Council of Mortgage Lenders show. Just one in five landlords now believe there’s still money to be made from buy-to-let, according to a survey by 

100% trouble

This isn’t the only headwind facing the housing market. Affordability has stretched as prices climb to dizzying highs, persuading Barclays to make the controversial decision to revive the 100% mortgage. Have we learned nothing from the last crisis? The housing market looks increasingly vulnerable and this could be bad news for Lloyds Banking Group (LSE: LLOY).

That’s because it has the greatest exposure to UK housing, with subsidiaries Halifax, Lloyds Bank and Bank of Scotland responsible for 25% of mortgage lending. Also, it has done more than any other bank to abandon foreign shores and focus on the domestic UK market. Bad news for the UK economy will spell bad news for Lloyds.

Deeper in debt

Bad debts may be extraordinarily low today but when global interest rates finally rise – and Fed hawks are flying again – that could swiftly change. More than seven years of 0.5% base rates may have primed the UK’s largest and deadliest debt trap, sucking millions into the market at unsustainable prices. Government programmes such as Help to Buy have further sugared the trap, luring innocent first-time buyers to what may be their financial doom. The housing market is now effectively being propped up by taxpayer largesse.

All this could come to a head on 24 June if the UK votes to leave the EU, although the polls currently suggest this won’t happen. But at today’s inflated prices, the UK property market is exposed to other shocks, such as US rate hikes or the next Eurozone banking crisis.

In March, when fund manager Neil Woodford warned Lloyds was vulnerable to a house price crash and not worth investing in, the bank replied by saying that this average mortgage customer has 54% equity in their property. That sounds convincing but is largely due to elderly owners sitting on massive gains after the last seven years of growth, new buyers will be far more exposed. Lloyds has made its case for the defence but it could be sorely tested if today’s property wobble is a sign of further problems to come.

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