With the Mortgage Market Review (MMR) rules now in place, housing market observers will be keeping a close eye on any new data over the next few months.

The Bank of England will wish to see some of the more extreme lending that has emerged over the last 18 months subdued. In particular, some of the higher loan-to-income multiples among first time buyers in London and the South East could cause concern in the event of rising rates.

Meanwhile, the Government will be keen that its housing-led recovery continues and spurs on the wider economy in the run up to the election.

The exact effects of the new 
MMR rules remain up for debate. Lenders have claimed that they were already operating under the new rules prior to their introduction on April 26th. If this is the case then it appears unlikely that we will see a significant slowdown in mortgage lending and hence market activity 
in coming months.

Possibly of greater importance is the Bank of England’s Financial Policy Committee (FPC) power to set tougher interest rate stress tests on new borrowers. The FPC is likely to get these powers in the summer and it may be during this period that we begin to see prospective borrowers struggle to get financing.

Given the importance of first time buyers in the recent surge of market activity (see Graph 4.1), any limit on their ability to borrow relative to current trends could lead to a slowdown in both house price growth and overall transaction levels.

Click the below image to enlarge

Unfortunately, this would also lead to prospective first time buyers remaining trapped in the private rented sector. Therefore, any move by the Bank of England to minimise threats to financial stability via the housing market should also be met 
by support from the government for the private rented sector.

Since the credit crunch, cash buyers have played an important role in driving market activity. With over 400,000 cash only transactions during the last 12 months, these are not just foreign investors in new build or cash rich buy-to-let landlords. They are just as likely to be downsizers and home movers and have probably begun to replace mortgage homemovers in some markets. At a fairly constant 35% of total market transactions (even during the last year), the scale of cash buyer activity will dilute any intervention in the market by the Bank of England but should not prevent that intervention.

Taken from
Residential Property Focus Q2 2014