Bleak midwinter for housing market as interest rates rise

Home-buyers in London are on average spending 56% of their earnings on their housing costs, with recent interest rate rises adding £3,000 per year to average mortgage bills

Rising interest rates are seeing house sales fall through and the price of homes across the country falling, according to figures from Britain’s biggest building society.

The Office for National Statistics says that London’s house prices fell in October, and that it was the only region in the country to report a decline for the month. Prices in the capital fell by almost 1per cent compared with September, as elsewhere house prices increased 0.9per cent or more in the north-east of England, West Midlands and Scotland.

The figures were reported yesterday, as the Bank of England was increasing interest rates by 0.5per cent to 3.5per cent – the highest level since the global financial crisis of 2007-2008.

But figures from mortgage-lenders the Halifax show that average UK house prices recorded their third consecutive and largest monthly drop since 2008, falling by 2.3per cent in November.

In the short-term, prices look set to continue falling as Rightmove has found the average asking price for a newly listed property has fallen by 2.1per cent in December so far, whilst the RICS UK Residential Survey of Chartered Surveyors has found demand among house-buyers also continued to fall in November.

The rental market is just as tough. Rents across Britain have risen by 12.1per cent to record highs over the past year and the average renter now spends 35per 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 0.1per cent. The increase in the cost of borrowing is intended by the Bank to curtail inflation; it is already dampening demand for mortgages.

Larry Elliott, The Grauniad’s economics editor, wrote, “The speed at which rates have risen and the dawning realisation among borrowers that there will be no return to the emergency levels reached during the covid-19 pandemic is bound to have an impact on an already weak economy… An entire generation has grown up believing that ultra-cheap borrowing is the norm.

“What’s more, many people have bought houses at high loan-to-income ratios in the belief that mortgage rates will be permanently low. Those people have now seen interest rates rise by more in the last 12 months than in 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 remortgage at significantly higher rates.”

People with a fixed-rate loans due to expire by the end of 2023 are facing average repayment hikes of around £250 a month, as they are forced to move onto a higher interest rate.

This would mean that mortgage costs surge by £3,000 a year for many families who are already seeing their finances stretched to breaking point during the cost of living crisis.

“The Bank of England has chosen to pile on the financial pressure felt by many households,” Chris Hodgkinson of the House Buyer Bureau, told Inside Croydon.

“Unfortunately, the short-term consequence of this decision will be thousands stretched even thinner due to the increased cost of their mortgage, with many more homebuyers choosing to sit tight and put off their purchase until 2023, at the very least.

“This will mean more sales falling through and a further reduction in market activity, which is sure to bring a further decline in house prices. As a result, we can expect the downward trends that have already emerged in recent months to continue well into the new year.”

The National Association of Property Buyers issued this statement: “House prices will continue their downward journey by perhaps 1per cent a month.

“What will be felt more acutely by those in the sector will be a sharp reduction in the number of transactions.”

Lawrence Bowles, director of research at the real estate company Savills, said the decline in London house prices could be explained by the capital being far more reliant on mortgage debt than the rest of the country, with average loan-to-income ratios and total mortgage costs far higher.

“Affordability constraints are the No1 reason why London’s house prices are underperforming the UK in the latest data,” he said. “That means London house prices are more sensitive to changes in interest rates than elsewhere.” Other estate agents predict that London property prices will underperform compared to the rest of the country for the next three to five years.

Separate data from mortgage provider Nationwide showed that the average mortgage payment rose to 56per cent of earnings in the third quarter in London, well above the national average of 34per cent.

ONS data showed that in Lewisham house prices fell 1.5per cent from September to October. Terraced and semi-detached London properties had driven the monthly fall, with declines of 1.4per cent and 0.9per cent respectively.

House price growth in London has underperformed the national average since the start of the coronavirus pandemic, triggered by people moving out of the capital in search of more space, and this has continued since the economy has reopened.

UK average house prices are 27per cent above pre-pandemic levels of February 2020 — more than double the 13per cent rise registered in London.

The Financial Times reports, “Most economists expect house price declines to accelerate in the coming months.”

Read more: Desperate tenants handed £250 per month rent hikes in 2022

About insidecroydon

News, views and analysis about the people of Croydon, their lives and political times in the diverse and most-populated borough in London. Based in Croydon and edited by Steven Downes. To contact us, please email
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