UK house price growth may finally be slowing

The pace of house price growth in the U.K. may finally be slowing, amid concerns about interest rates rising sooner than expected.

Home-owner sentiment about what will happen to the value of their house fell in June for the first time in six months, according to the Knight Frank/Markit House Price Sentiment Index, which often foreshadows where house prices are headed.

This may increase hopes of a soft landing for the property market. There have been fears in recent months of a bubble building, particularly in London.

House price in the U.K. were 9.9 percent higher in April compared with the same month 2013, but in London, they leapt by 18.7 percent over the year, according to data from Britain's Office for National Statistics.

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In the capital - the driving force behind house price growth - expectations for future price rises were at their lowest level since December 2013, according to the index.

"All of the signals are starting to show a receding from break-neck growth," Grainne Gilmore, head of U.K. residential research at real estate agent Knight Frank, told CNBC.

The index was measured between June 11 and 16. On June 12, Bank of England Governor Mark Carney spooked the markets by suggesting interest rates would rise sooner than thought.

This could mean borrowers are suddenly faced with higher monthly mortgage payments. There are also signals that the mortgage market is tightening, with so-called "mortgage rationing" becoming stricter.

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More stringent background checks were imposed as part of the Financial Conduct Authority's Mortgage Market Review, and there are suggestions from government that banks may be forced to limit the amount they can lend to 3.5 times borrowers' salaries. The average buyer of a home in London currently borrows 3.8 times their annual salary.

"So far, this is a signal rather than a fact of policy, but it shows the mood music in the country," Gilmore said.

The amount of money borrowed for mortgages steadied in May to £16.5 billion ($28.14 billion), according to the Council of Mortgage Lenders – another sign that borrowers and lenders are getting more cautious.

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At the top end of the market, the rush of foreign money into the country has slowed slightly, as the pound strengthens and values skyrocket.

"There is a growing perception that London is fully valued and the prospects for future capital growth have diminished," Yolande Barnes, director of World Research at real estate agent Savills, told CNBC.

"Prime London seems to have reached a high plateau."

Those predicting a soft landing point out that, for most of the U.K., there has not been a recovery in house prices comparable to that in London.

"I don't think there's a risk of a downturn," Barnes said.

- By CNBC's Catherine Boyle

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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