Chill wind in south east

Homebuyers throughout the South East shuddered last week as they learnt that two mortgage lenders were cutting back on the amounts they would lend in property hotspots.

This raises the prospect of falls in prices if buyers can no longer borrow to the hilt.

House prices rose by 11.7% on average across the country last year, according to the Halifax house price index, with the strongest rises recorded in East Anglia at 19.8%, Greater London at 17.1% and the south west at 16.2%.

Decisions by NatWest and Alliance & Leicester to demand larger deposits in areas where prices have risen most sharply are certainly significant, but homeowners have little reason to panic yet. Neither lender has a large enough grip on the mortgage market to exert significant influence on prices in the areas they have targeted.

Halifax, the country's largest mortgage lender - which can move the market - is bitterly opposed and is demanding that lenders debate the issue under the auspices of the mortgage trade organisation, the Council of Mortgage Lenders.

Homeowners concerned about the effect on prices may also take some comfort from the knowledge that NatWest and A&L both claim to have had these policies in place for some time. Alliance & Leicester's cut back began nearly four months ago, yet the housing market has remained buoyant.

The company says it implemented its policy because of concerns over the economic outlook after September 11. It now demands deposits of 10% on properties valued at between £100,000 and £250,000 throughout the south-eastern corner of England, bordered by the following postcode areas:

CO Colchester
CM Chelmsford
SG Stevenage
MK Milton Keynes
OX Oxford
RG Reading
SO Southampton
PO Portsmouth

A&L is now willing to advance loans of 90% of valuation, against 95% previously.

A&L says: 'There has been the suggestion that our action could impact on property values. There is no foundation for this as we are just one lender among more than 100 in a very competitive market.Ninety per cent of our new lending prior to this was below 90% of the value of the customers' homes.

'If you do want to borrow more than 90%, there are many lenders out there who will still want to speak to you.'

NatWest is cutting back on 95% loans in house price hotspots, but appears to be operating on an almost case-by-case basis, refusing to name specific areas. Where a lender demands a deposit of 10%, rather than 5%, a borrower trying to finance the purchase of an average-priced property in Greater London - just under £180,000, according to Halifax - would have to put up savings of £18,000. This will create an obstacle for some borrowers, particularly first-time buyers. For many, London property has already moved beyond their reach because their incomes are not high enough to get them the mortgages they need.

Halifax spokesman Shane O'Riordan observes: 'Unfortunately, in London, the market has already done the job.'

Major property hotspots are the preserve of wealthy buyers who pay cash, or of second- or third-time buyers who are transferring equity from previous properties.

For a £180,000 property, assuming a 95% loan, a single buyer would need to borrow £171,000. This is more than five times the average annual salary in London, which is about £34,000 a year. So prices are already beyond the reach of most average earners.

Halifax argues that while the moves by NatWest and A&L do not on their own threaten the market, 'our concern is if other lenders go down the same route'.

'If the trickle becomes a flood, we have a major problem. It will have an impact on the market, and mainly on first time buyers.'

Milan Khatri, an economist for the Royal Institution of Chartered Surveyors, says the moves by A&L and NatWest do not pose a serious threat to prices at present.

'The key thing at the moment is that there are only two lenders. The lending market is quite deep [but] we would worry if it became a widespread practice,' he said.

'The other key thing is how long this policy operates for. If it is prolonged, it may have some sort of damaging impact.'

The Council of Mortgage Lenders says it cannot intervene in lenders' individual lending strategies. However, the CML's executive committee is due to meet later this week and a spokeswoman says that the issue can be discussed if members of the board agree. At present, NatWest and A&L appear to be alone in targeting specific areas for loan cuts.

But after a renewed period of roaring house price inflation, banks and building societies are under pressure from regulators to avoid a lending binge.

Regulators fear a repeat of the housing recession of a decade ago, where plummeting prices led to negative equity.

Recently the Financial Services Authority warned lenders to take care. Seen in this light, the moves by NatWest and A&L seem entirely reasonable.

But banks and building societies can cut back on lending in several ways other than targeting areas for special treatment. They can reduce the amount they will lend in relation to salaries. They can also cut back on loan-to-value ratios across-the-board. It became almost impossible to obtain a 100% mortgage after the housing slump of a decade ago, but lenders have gradually pushed out ratios as the housing market and the economy have taken off.

The problem for lenders, as much as for borrowers, is the unpredictability and volatility of house prices in the UK. Each economic cycle throws up new trends.

Five years ago, lenders would have been reluctant to offer loans of five times salary, but now they are much less nervous about this because interest rates are depressing monthly mortgage costs.

But however distant the prospect may seem, future steep rises in interest rates cannot be ruled out.

Hugh Dunsmore-Hardy of the National Association of Estate Agents says lenders should be 'far more concerned about the multiple between earnings and mortgage repayments than the percentage advance on properties'.

Saxon Brettell of Cambridge Econometrics thinks the moves to restrict lending in certain areas is a 'rational response' to the market outlook.

'I think it is a symptom rather than a cure. You have a sense that young first-time buyers have been more enthusiastic than a more sensible perspective would justify,' he said.

With the might of Halifax ranged against them, lenders keen to pursue selective lending restrictions will probably remain in a minority. But the row is a sign of nervousness about the outlook for house prices. This is a signal for caution to borrowers as much as lenders.

Homeowners in housing hotspots may fear the impact of tighter lending policies, but it is worth recalling the cliché that the higher house prices continue to rise, the further they have to fall.