When was London last not No1 for average loan-to-income lending? Less than 20 years ago

The Bank of England move to introduce mortgage caps today (Source: Getty)

As many people were expecting, the Bank of England (BoE) has moved to control mortgage lending, restricting to 15 per cent the proportion of mortgages that can exceed a loan-to-income ratio (LTI) of 4.5.

A look at recent data from the Council of Mortgage Lenders (CML) however shows that nowhere in the UK has ever approached that ratio.

The closest the UK has ever been to this cap was in the first quarter of this year (the most recent quarter for which CML provides data), when the average ratio across the UK as a whole stood at 3.23.

In that quarter Greater London saw loans climb to a median LTI ratio of 3.72. You have to look back to 2001 to find a quarter where the median ratio in Greater London was nearly a whole point down, at 2.77.


(Source: CML data)

So what is the Bank controlling against? Paul Smee, director general of the CML, says that the BoE controls "are acts of future-proofing the market, not stamping on current practices." Staff at Threadneedle Street don't see current current mortgage markets as an imminent threat to stability, but want to act pre-emptively.

Smee suggests that the tools introduce today could stop a "creep towards higher indebtedness", rather than trying to tackle any irresponsible lending. But today's changes won't fix a longer-term problem. There still exists a very present gulf between supply and demand. Those that want houses are still finding that there are not enough available.

The BoE may partly be looking to future-proof the market because ratios have been climbing consistently, with London usually leading the rise. The chart includes London and those areas that have at some time or another had the highest LTI ratio in the UK.

london mortgage rates

(Source: CML data)

The current upward trend is most likely a result of a rapid rise in house prices which has not been offset by a similar rise in wages. Since 1998 house prices have gone up by 158 per cent, while earnings growth hasn't kept up.

While it is possible that changing consumer preferences have moved towards spending more on housing, fueling larger ratios, this seems unlikely. Recent data shows the percentage of homeowners in the UK has actually been falling, albeit by a small amount.

Historically London has usually been on top, and although various regions have periodically unseated the capital, at no point since 1979 (when the data set begins) has London been out of the top spot for more than a year.

The last year that another region had a higher LTI ratio was in the second quarter of 1995, when the south east had a median ratio that was 0.01 higher. In 1993 the south west was 0.02 higher during the third quarter.

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