London house prices could fall by 12%

London house prices will lead UK property values lower over the next two years as mortgage rates continue to climb.

UK house prices rose by 15.5% in the year to July, according to the latest figures from the Office for National Statistics (ONS). That might make you think the housing market is in rude health, but there is trouble around the corner as interest rates continue to rise. And it looks as if London house prices will be the first to feel the pain.

The figure of 15.5% is distorted by buyers rushing to beat the end of the stamp duty holiday in June last year – we’re likely to see house-price growth cooling from now. 

Figures released by Halifax last week suggest this is true – while prices were still rising at 11.5% in the year to August, that’s down slightly from 11.8% in July. 

Shortage of supply means no house-price crash – for now

The Royal Institution of Chartered Surveyors, which polls its members working in residential sales and lettings to gather sentiment about the market, says in its July report that – ”for the time being at least” – prices are being propped up by a lack of properties coming to market, with estate agents’ stock levels “close to an all-time low”. 

But, it adds, “new buyer enquiries continue to decline at a steady pace”. 

Indeed, the signs of a downturn are already visible. The FT reports that housebuilders have said fewer buyers are reserving homes, while estate agent Winkworth says it has seen “a near 40% fall in sales” as rising interest rates cool the market. 

Housebuilders’ share prices have fallen as the outlook for the sector has changed. Barratt is down by 45% so far this year, while Taylor Wimpey is down 40%, Persimmon 49% and Redrow 30%.

David Thomas, CEO of housebuilder Barratt, told the FT that there was “no question that consumer confidence is low and there’s uncertainty in terms of cost of living, inflation and the political backdrop”. But, he added, lowering prices would be “a last resort”.

Higher mortgage rates could see prices fall

He may not have any choice. With inflation remaining high, the Bank of England has already raised rates to 1.75%. And it is widely expected to raise them further – to 2% or more – next week. That’s going to drive mortgage rates higher, bad news for higher value properties. 

London house prices are the highest on average in the country, making the market more susceptible to any downturn. 

Mortgage rates have almost doubled since 2020, says Ruth Jackson-Kirby in this week’s MoneyWeek magazine: “In 2020 you could fix your mortgage for two years at an average rate of 2.24%. Now the average two-year fix is 4.09%”. 

Nic Hopkirk, writing on Zoopla, says she doesn’t anticipate “any widespread falls in house prices if mortgage rates peak at 4%”. But, she adds, “the higher rates move above 4%, the greater the impact on the market”.

We’ve long said that the most important factor driving house prices is the cost of borrowing. 

Cheap money leads to inflated asset prices in all markets, and housing is no exception. Add in soaring energy prices and raging inflation, it seems obvious that house prices cannot continue to rise at anything like the rate of the last few years. 

London house prices will lead the decline

The market is “facing a storm”, says Bloomberg, with 1.8 million people on fixed-rate mortgages coming to an end next year and needing to refinance at much higher rates of interest, all with real wages “plunging at a record pace” and a recession looking “more and more likely”.

Bloomberg News analysed Land Registry data and concluded that “cracks are already starting to appear” in the market, with London house prices leading the way. Property values are “flat or falling in almost half of the city’s boroughs”.

Indeed, London looks set to be the worst hit in any downturn, says Capital Economics, reports Melissa Lawford in the Telegraph

With prices higher and buyers more dependent on larger mortgages, London house prices will fall by 12% by the end of 2024 – 8% in 2023 and 4% in 2024 – while national prices will decline by 7%. A fall of that size means the average London home will lose £65,560 in value.

But not all London property is equal. At the higher end, prime central London properties will fall by just 2% in 2023, and actually rise by 1% in 2024. Buyers of those properties “typically part of the global super-rich”, says Lawford, and so are not as exposed to rising mortgage rates, while the weak pound makes London property more attractive to overseas buyers.

If you are on a fixed-rate mortgage that is set to end any time in the next six months, it makes sense to shop around for the best rate you can now – many providers’ offers are valid for six months. But the best deals don’t last long. See here for the best rates around at the moment.

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