London house prices to tumble by 10pc in next two years
The South East is forecast to bear the brunt of the downturn in the market,
‘If the Bank Rate rose to 3pc, buyers’ ability to afford a home would deteriorate to the same level as before the financial crisis’
‘Affordability in the capital was already stretched’
London house prices are predicted to fall 10pc in the next two years as its property market bears the brunt of the cost-of-living crisis. While house price growth in the capital has returned to form since the pandemic wiped out demand for urban homes, Capital Economics said the market was due a reckoning in 2023 and 2024, with property values falling 6pc and 4pc in the respective years. The South East is set to suffer a similar fate, with prices falling by 4pc and 3pc.
Both come in higher than forecasts of an average 5pc drop across the country over the two-year period.
It has been notoriously difficult to join London’s property ladder: the city is the only region in Britain where the number of first-time buyers has not more than doubled in the past decade, instead rising by a lesser 82pc.
The vast majority of buyers in London require a mortgage and sizeable savings for a deposit, leaving them uniquely susceptible to inflation and rising interest rates.
It is because affordability in the capital is already so stretched that it will be the first housing domino to fall as the cost-of-living crisis bites.
Costlier mortgages to cripple buyers
Almost all buyers in London purchase with a mortgage, which will soon become increasingly expensive to service. Of the 20 locations with the fewest cash buyers in the country, 13 are London boroughs, according to analysis by estate agency Hamptons.
Some 90pc of buyers in Barking and Dagenham and Waltham Forest last year had to use a mortgage, for instance.
These are set to become more expensive. While the Bank of England last week increased the Bank Rate from 0.75pc to 1pc – the highest level in 13 years – the rise will not be the last as it scrambles to contain rampant inflation. Capital Economics as forecast the Bank Rate will hit 3pc by 2023.
If that happens, the average borrower taking out a loan in Barking and Dagenham would pay £413 more per month compared to today’s rates. Those in Waltham Forest would pay £618 more.
Capital Economics’ Andrew Wishart says: “If the Bank Rate rose to 3pc, the ability of buyers to afford a home would deteriorate to the same level as before the financial crisis.”
Safer buyers have been hardest hit
The type of mortgage used by borrowers in the capital will also put them at a disadvantage to the rest of the country, particularly those joining the property ladder for the first time.
David Fell, of Hamptons, says: “London is quite different to the rest of the country in that nationally, first or second-time buyers tend to borrow using a 5pc or 10pc deposit.
“However, borrowers in London can’t afford to pay the interest on a mortgage of that size and so need to raise a 30pc or 25pc deposit.”
Borrowers with bigger deposits have been hardest hit. The average two-year fixed rate on a mortgage requiring a 25pc deposit has risen by almost 1 percentage point, from 1.98pc to 2.9pc since October. However, loans that require a 5pc deposit have only increased by 0.03pc, although they do charge 3.35pc. If homeowners are forced to sell as they cannot afford to remortgage, or buyers simply cannot afford to take out a mortgage in the first place, the number of homes for sale would rise and push down prices.
Lawrence Bowles, of estate agency Savills, says: “Affordability in the capital was already stretched – the recent rapid price growth we’ve seen has made it a lot worse.”
London homeowners already pay the biggest share of their take-home pay towards mortgage repayments compared with any other region. First-time buyers in the capital spend more than half their earnings on their mortgage, compared to 37pc in the South West, 26pc in Wales and 19pc in the North of England.
As rising mortgage repayments further eat into their income, so too will soaring utility, food and tax bills, further stretching buyers’ ability to afford a new or existing loan.
A recent survey of 2,000 adults found three quarters expected to be worse off this year as the cost of energy, food and fuel rose alongside controversial tax rises including the National Insurance increase. The research, by insurance broker Lifesearch and the Centre for Economics and Business Research consultancy, found those in London would be hit hardest.
The average household in the capital is expected to be £321 worse off each month, or £3,859 a year, compared with the rest of the country whose costs will rise by £252 a month.