By Neil Callanan

(Bloomberg) — Sue Munden bought her five-bedroom house in the southwest London district of Streatham in November after negotiating the price down to 610,000 pounds, about 100,000 pounds less than a similar home on the street sold for in April.

“I did look earlier in the year, but I wasn’t able to have an offer accepted at a level I was comfortable with,” said Munden, who was surprised to get the property for 90,000 pounds ($141,000) less than the offer price. “I thought house prices were too high.”

The drop in prices is spreading through London as the Bank of England’s restrictions on mortgage lending limit some borrowing. Values fell or were unchanged in 18 percent of the city’s postal-code districts in the three months through October, double the percentage of the previous quarter, according to data compiled by property researcher Hometrack Ltd.

“There’s nothing natural about this slowdown,” said Rob Wood, an economist at Berenberg Bank in London. “It’s been induced by what the Bank of England has done and what the government has done.” Soaring house prices “would have been dangerous, so absolutely they needed to take action and it’s really good news that it seems to have worked,” he said.

The BOE imposed limits on high loan-to-value mortgages after the government said in June it would give it the authority to do so. The Financial Conduct Authority, an independent organization that works with the U.K. Treasury, in April introduced stricter affordability checks on buyers and required banks to verify a borrower’s income. It also reined in interest- only loans.

Peak Passed

Prices in London are down as much as 10 percent from a peak in the Spring, said Jeffrey Doble, chief executive officer of Thamesview Estate Agents Ltd. The company operates 60 offices in London through brands including Dexters.

Values in the city had surged by almost 80 percent since the last trough in March 2009, according to the Office for National Statistics office.

The central bank and the FCA enacted the lending controls to stem rising household debt, which BOE Governor Mark Carney has called the biggest threat to the U.K.’s economic recovery. Borrowing, including mortgages, stands at about 145 percent of gross disposable income.

Even with the bank’s new rules in place, the value of U.K. mortgage borrowing is expected to rise by 5 billion pounds to 120 billion next year, the Council of Mortgage Lenders said on Dec. 16. The household debt-to-income ratio will start to increase across the U.K. next year after falling since 2008, according to the Office for Budget Responsibility. Combined with rising consumer spending, the measure will exceed 180 percent by 2020, the OBR said Dec. 3.

Loan-To-Value

High loan-to-value lending, with down payments of 15 percent or less, in Britain fell more than 30 percent from September through November, property appraiser e.surv said this month.

The lending restrictions are hitting property values in the capital harder than in the rest of the country. The London house-price index fell 1.9 percent in October from its peak in August, according to the statistics office. That’s almost twice the decline in the U.K., the data show.

Sales, offers, listings and viewings in London were lower than expected in November, Jeremy Leaf of broker Jeremy Leaf & Co. wrote in a Royal Institution of Chartered Surveyors poll published Dec. 11.

Realism Returns

“Prices went up too far and too fast earlier in the year, so realism has returned,” he said.

The biggest price declines in London are in the central, southwest and west districts, said Richard Donnell, director of research at Hometrack, which measures price changes by postal code. Those districts are traditionally the more affluent parts of the city.

Values fell 0.5 percent in southwest London and 1.1 percent in Fulham in October from a month earlier, according to broker Knight Frank LLP. Prices in Kensington and Chelsea, the U.K.’s most expensive borough, declined by 2.5 percent in the month to an average of 1.28 million pounds, according to the Land Registry.

Doble of Thamesview said the declines are a pause in a housing market that’s still fundamentally positive.

“Demand is strong, supply weak and therefore in the medium term prices will rise,” he said. “The best time to buy is when the market is catching its breath as it is right now.”

Asking Prices

Asking prices in the capital dropped 5.1 percent from November and are forecast to rise by 1 percent to 3 percent next year, property website Rightmove Plc said Dec. 15.

Munden said the discount she secured on her home in Streatham will shield her in case values continue to fall.

“I felt it was good value for money which would protect me from any potential weakening in London house prices,” she said. – BLOOMBERG

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