After Lloyds (LSE: LLOY) (NYSE: LYG.US) announced that it was placing restrictions on mortgage lending, analysts widely speculated that other lenders would follow, and they did.
This week Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) introduced its own lending restrictions, similar to those already in place at Lloyds.
It would appear, according to Nationwide, that these restrictions are already having some effect.
Restrictions
Last month, state-backed lender Lloyds announced that it was taking steps to reign in mortgage lending within the London market. The bank introduced restrictions on the amount people were allowed to borrow as a multiple of their annual income.
On Tuesday, RBS also announced its own set of lending restrictions. The bank introduced a four times loan-to-income cap and maximum term of 30 years for all mortgages worth £500,000. These restrictions are similar to the ones Lloyds already has in place.
However, RBS’s restrictions are not expected to have that much of a direct effect on the market. RBS has only a 9% share of the London mortgage market. As a result, the move will affect only about 2.6% of the bank’s lending in the capital.
Still, lending restrictions are a warning that things might be escalating faster than these lenders are comfortable with, although consumers still have plenty of choice when it comes to lending.
While RBS and Lloyds are pulling back, Woolwich, Santander UK and Clydesdale have all jumped in, becoming the most active lenders for the London market during recent months.
But it’s not just banks taking advantage of this lending boom. The financing arms of estate agents and home builders are eager to lend. For example, Knight Frank Finance and John Charcol are two alternative mortgage brokers which have seen business boom during recent months.
Having an impact
However, there are underlying trends developing within the property market which are worrying analysts.
According to Nationwide’s monthly house price index average home prices rose 0.7% during May, while the annual pace of price growth edged up to 11.1% from 10.9%.
Despite this growth, according to the building society:
“…There have been tentative signs that activity in the housing market may be starting to moderate, with mortgage approvals in April around 17% below January’s high…It is too early to say whether nationally this is indicative of a cooling trend in the wider market…”
Surprisingly, while the housing market is accelerating, construction sector activity, measured by Markit hit a seven-month low in May. What’s more, according to industry analysts the housing industry is still struggling to rebuild itself in the wake of the financial crisis to match demand.
These statements could be used to justify the sustainability of the housing boom but they also justify comments made by the Bank of England suggesting that the property market has deep structural problems.
One thing is for sure, house prices can’t keep on going up forever, especially when wages are struggling to keep up.
