More Britons are pulling the plug on home purchases amid signs that the market’s 16-month rally is coming to an end after banks tightened mortgage standards.
In August, failed deals rose to 26.4 percent from 24.4 percent a year earlier, driven by potential buyers getting cold feet and walking away, said Donna Houguez, a market analyst for residential property investor and data provider Quick Move Now. In July, failed purchases were marked by willing buyers who were prevented from closing deals because they couldn’t secure a big enough mortgage, she said.
“We saw a sharp increase in the number of buyers who made a generous offer in order to secure a property, then changed their minds and pulled out amid fears of an imminent property market collapse” in August, Houguez said.
Bank of England Governor Mark Carney is introducing a series of measures to limit mortgage lending after U.K. home prices rose 9.9 percent in the 12 months through July to a record 270,636 pounds ($450,000), according to researcher Acadata. These include limits on how much banks can lend relative to a borrower’s income, and requirements that banks turn down loans to homebuyers who fail a stress test that assumes an immediate 3 percentage-point increase in the benchmark interest rate.
The measures have led to an increase in failed deals as banks give initial approval, then decline to give the full loan.
“We’re seeing people in professional vocations like lawyers and accountants that have had agreements in principle granted and then, when push comes to shove, the banks won’t get to the number they agreed,” Mark Harris, chief executive officer at mortgage broker SPF Private Clients, said in an interview.
Measures taken by the BOE include limits on mortgages worth more than 4.5 times a borrower’s annual income starting next month. The country’s eight biggest lenders will be required to show how they would cope if interest rates rose to 4 percent and house prices dropped by 35 percent. The BOE’s benchmark interest rate has remained at a record-low 0.5 percent since March 2009.
Value gains in London, which led the U.K. since 2009, slowed sharply in the past six months. In August, 11 percent of the capital’s districts by post code recorded increases, down from 87 percent in February, researcher Hometrack Ltd. said. Perceptions of what’s ahead are as important as the new regulations themselves, said Richard Donnell, director of research at Hometrack.
“Talk of a housing bubble and warnings from the Bank of England have impacted sentiment, while tougher affordability checks for mortgages and rumblings around interest rate rises is starting to make buyers think twice,” he said.
A cash buyer seeking to purchase a home worth 1 million pounds to 5 million pounds can get a discount of about 5 percent of the asking price as rival bidders are slowed by the new regulations, Oliver Hooper, director of broker Huntly Hooper Ltd., said in an interview.
Sellers prefer cash buyers over someone making a higher offer because the regulations cast more doubt over whether a mortgage will be obtained, he said.
Though the price slowdown has been more pronounced in London, the regulations have affected values across the U.K. Values gained 5.3 percent in August from a year earlier, down from 6.5 percent in July, according to Rightmove Plc.
The number of failed sales in April, when the Financial Conduct Authority imposed lending restrictions as part of its Mortgage Market Review, soared to 29 percent from 18 percent, according to Quick Move Now, which supplies data to the BOE. A month later, more than 28.5 percent of deals fell through, compared with 21 percent a year earlier.
Increased vigilance by the banks means they’re rooting out more potential borrowers who stretch the truth about their ability to pay off a mortgage, Clive Rutland, director at Southampton-based Rutland Chartered Surveyors said in an interview.
Buyers “aren’t being as forthright about their earnings,” with late rejections from lenders proportionally higher among more affluent buyers, he said. “Previously, there were assumptions about people that are not now being made. The banks are cross checking people’s outgoings from different sources and now it’s all coming out.”
More caution among the biggest lenders such as Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc can help smaller banks, which don’t face the same stress tests, to increase their mortgage market share. New lending at Coventry Building Society rose 17 percent to 3.4 billion pounds in the six months through June from the same period a year earlier, it said Aug. 1.
“The banks have got quite stretching targets to hit in terms of lending volumes and banks make money by lending money,” Harris said. “They’ve got to get some money out the door and you can’t do that if your criteria ties you up in knots.”