Stringent lending has led to a fifth consecutive monthly decline in housing supply coinciding with a levelling off of new buyer demand, according to the latest report from the Royal Institution of Chartered Surveyors (RICS).

There are too few properties coming onto the market and in London, where fears of an overheating market have been expressed, demand for new homes fell for the first time since June 2012.

In May when UK house prices reach record levels of £186,512 and greater lending restrictions begin to impact the market, respondents reported that banks are lending less, with the average Loan to Value (LTV) ratios among first time buyers dropping to 85.3% from 86% in April.

Meanwhile, respondents’ expectations for house prices over the next 12 months dropped from 3.9% to 3.6%, the lowest since December 2013.

Although more modest expectations for growth in activity are visible in London, there are some early signs that concerns over both supply and finance could be influencing prospects elsewhere in the country.

For example, sales expectations over the next three months in the South East show a net balance of 29% of chartered surveyors expect greater market activity and a net balance of 48% in the South West, down from 66% and 93% respectively six months ago.

The tightening in lending conditions facing some parts of the housing market even led to a modest pick up in demand in the rental sector and rent prices are now projected to grow at around 2.5% over the next 12 months, and at an average annual rate of 4% over the next five years.

‘What we are really seeing is some of the very strong upward momentum starting to come off the housing market, as a lack of supply, higher prices, more prudent lending measures and some of the talk from the Bank of England are creating a level of caution among sellers and buyers,’ said Simon Rubinsohn, RICS chief economist.

‘The most visible indicators of this are the revised downwards price expectations for the next 12 months and the flatter picture regarding new buyer enquiries. In particular, we’re seeing the London market level off,’ he explained.

‘There is some evidence to suggest that the Mortgage Market Review (MMR) has contributed to a tightening of the funding market, although it is hard to disentangle this from other factors which are now impacting on the sector and to know whether it will simply be a temporary influence as lenders adjust to the new environment,’ he added.

But the latest report and data from the Council of Mortgage Lenders suggests that MMR has not dented the lending market with loans up in terms of numbers and values.