Bleak midwinter for housing market as interest rates rise
Homebuyers in London spend an average of 56% of their income on their housing costs, with recent rate hikes increasing average mortgage bills by £3,000 a year
The Office for National Statistics says house prices in London fell in October and that it was the only region in the country to report a fall for the month. Prices in the capital fell almost 1 per cent compared to September, while house prices elsewhere in the north-east of England, the West Midlands and Scotland rose 0.9 per cent or more.
The figures were released yesterday as the Bank of England hiked interest rates by 0.5 percent to 3.5 percent – the highest level since the 2007-2008 global financial crisis.
But Halifax Mortgage Licensing figures show that average house prices in the UK recorded theirs third largest consecutive monthly decline since 2008, with a 2.3 percent drop in November.
In the short term, prices are likely to fall further as Rightmove has found that the average asking price for a newly listed property is down 2.1 per cent so far in December in December, while the RICS UK Residential Survey of Chartered Surveyors has found demand as home-buyers went also further back in November.
The rental market is just as tough. Rents across the UK rose 12.1 per cent to record highs last year and the average renter is now spending 35 per cent of their salary on accommodation – the highest level in a decade, according to Zoopla.
A year ago, interest rates were at a record low of 0.1 percent. By raising the cost of borrowing, the bank aims to curb inflation; it is already dampening demand for mortgages.
larry elliot, The Grauniads The business editor wrote: “The speed at which interest rates have risen and the dawning realization among borrowers that there will be no return to the emergency levels achieved during the Covid-19 pandemic will inevitably impact an already struggling economy … A generation has grown up believing that ultra-cheap credit is the norm.
“Furthermore, many people have bought homes on high loan-to-income ratios in the belief that mortgage rates will be permanently low. These folks have now seen interest rates rise more in the last 12 months than any year since 1989 and are now facing a serious reality check. While fixed-rate home loans will shield them for a while, they will eventually have to restructure at significantly higher rates.”
People with fixed-rate loans maturing by the end of 2023 face average principal increases of around £250 a month as they are forced to switch to a higher interest rate.
This would mean mortgage costs increase by £3,000 a year for many families whose finances are already stretched to the breaking point during the cost of living crisis.
“The Bank of England has decided to increase the financial pressure on many households,” said Chris Hodgkinson of the House Buyer Bureau At Croydon.
“Unfortunately, the short-term consequence of this decision will be thousands thinning even more from the increased cost of their mortgage as many more homebuyers choose to sit still and delay their purchase until at least 2023.
“This will mean that more sales will fall through and market activity will continue to decline, which will certainly result in further declines in house prices. We can therefore assume that the downward trends that have already been discernible in recent months will continue well into the new year.”
The National Association of Property Buyers issued this statement: “Home prices will continue their downward movement at perhaps 1 percent per month.
“What the industry will feel more strongly will be a sharp drop in the number of transactions.”
Lawrence Bowles, research director at property firm Savills, said the drop in property prices in London could be explained by the capital being far more dependent on mortgage debt than the rest of the country, with average loan-to-income ratios and overall mortgage costs much higher.
“Affordability constraints are the main reason London’s house prices are underperforming the UK according to the latest data,” he said. “This means that house prices in London are more sensitive to interest rate changes than anywhere else.” Other estate agents predict that London house prices will underperform the rest of the country over the next three to five years.
Separate data from mortgage provider Nationwide showed that the average mortgage payment rose to 56 percent of income in London in the third quarter, well above the national average of 34 percent.
ONS data showed that Lewisham house prices fell 1.5 per cent from September to October. Terraced and semi-detached homes in London had driven the monthly decline with declines of 1.4 percent and 0.9 percent, respectively.
Property price growth in London has lagged behind the national average since the start of the coronavirus pandemic, prompted by people moving away from the capital in search of more space, and this has continued since the economy reopened.
Average house prices in the UK are 27 per cent above pre-pandemic levels in February 2020 – more than double the 13 per cent rise recorded in London.
That financial times reports, “Most economists expect house price declines to accelerate in the coming months.”
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