London property price crash?

House prices in the capital could comfortably fall by up to 10% in the next six months, potentially more. The problem is cheap money, specifically the fact it no longer exists. Since the Global Financial Crisis, people have been able to buy London property because money was dirt cheap. You could get a whopping great big mortgage at 1%-2%, which enabled you to buy a prime London home. With rates having shot up since the now infamous mini-Budget, the buying power and confidence people had just a few months ago no longer exists and prices can only go one way as a result, and that's down. Prices will rebound as they always do in the capital, but it could take a few years for them to do so. It all depends on the length and depth of the recession that almost certainly lies ahead, and the amount of jobs that are lost. For now, the immediate problem people are facing is the remortgage crunch. All those people who took out the biggest possible loans they could at stupendously low rates are going to face severe mortgage shock in the months ahead. Many over-leveraged Londoners will be forced to sell, which will increase supply and therefore drive down prices. 2023 could be a calamitous year for the capital. Speaking to a good mortgage broker to ensure you get the very best rate possible has never been more important.

A house price crash in the capital is now a fait accompli. The only unknown is how hard and how fast the crash is. Only a few weeks ago, I was fairly confident the crash would be minimal, but then Liz Truss and Kwasi Kwarteng blew the mortgage, property and bond markets apart. We will now be lucky if we manage to get away with a 10% drop in prices, and a fall of 20% in London cannot be ruled out. Projected monthly repayments will have doubled for some first-time buyers in the past few weeks alone, making buying a property practically impossible. This is an incredibly cruel blow for those that have put their lives on hold to save for a deposit for a number of years. The outer London boroughs such as Croydon, Sutton, Enfield and Barnet are likely to see the biggest falls, as they are the more affordable areas for first-time buyers who want to live and work in London but can't quite afford the more expensive Zone 4 and Zone 3 hotspots. The new build estate agents I work with are already reporting a drop of a third in the usual level of enquiries, with asking prices for new build apartments on the market being slashed by up to 10%. Higher interest rates have literally killed the housing market stone dead. Never have we seen, or are likely to see again, such a blatant and avoidable act of self-harm inflicted by a Government. Help-to-Buy ending has been navigated cautiously by house builders, developers and real estate consultants, as have the impact of Brexit, the invasion of Ukraine and Covid. However, mortgage product withdrawals and rate hikes of recent weeks have pushed the market over a cliff with first-time buyers now stranded in a no man's land where houses are unaffordable and rental costs have gone stratospheric due to increased demand.

It is very likely prices in the capital will drop 15% in the next six months. As brutal as that sounds, and as we saw after the Global Financial Crisis, prices can bounce back quickly, too, and the average house price has doubled since. A sharp house price crash in the capital is now a very realistic possibility. But prices will recover, as they always do. Prime London areas like Chelsea, Knightsbridge and St John’s Wood are always the hardest hit, but the flip side is this these are the areas where the largest gains are made for wealthy buyers who can buy at a discount and wait for prices to eventually recover.

With swap rates having increased at a very steep rate, lenders had no choice but to increase mortgage rates. As rates continue to soar, there will undoubtedly be fewer buyers. Monthly outgoings will be the highest most buyers now will have ever experienced so there will be a reluctancy about whether now is the right time to buy. People selling their homes will understand that increased rates means fewer buyers, and while, in an ideal world, they would like to sell their homes for more, they will have no choice but to reduce the price. House prices in London will, in my opinion, drop by 5%-10% over the coming months as demand drops off a cliff. Having had a look on Rightmove and Zoopla over the past few weeks, I have noticed several properties in London being reduced in price. It has already started. Higher rates mean the lenders change their affordability assessments, however, for many earnings above £50-60,000 and above per year, will see little effect to their borrowing ability. Lenders are still able to lender 5x income in some situations, and with the help of new lenders such as Proportunity, an equity loan provider, people may still be able to borrow the amount required. The main issue we are seeing is if people can afford the monthly payments. With rates starting from 5.80%+ and cost of living increasing, not many people want to be paying out so much for their mortgage payments, so they are putting purchasing a home on hold. I don’t believe there will be a housing market crash in the Capital, but more of a market correction. As the £ is weaker, we may see more foreign investors purchasing properties in the Capital, which may help prevent a crash.

A buyers' strike in the capital is a real risk if mortgage rates remain at their current levels. With average 2- and 5-year fixed rates having risen from around 4% to over 6% in just a few weeks, taking out a mortgage to buy a London property has become a very different prospect and potential buyers are now thinking twice. Many buyers are worried prices in the capital are on the edge of a precipice.

The rising cost of borrowing will continue to affect affordability and cause house prices in London to contract sharply, by 5%-6%. The upward push on prices in previous months due to the lack of supply has been negated due to soaring mortgage costs. We’re also anticipating that some lenders will continue to reduce their loan sizes in the coming weeks. However, the drop in home prices will not be as severe as what the country experienced during the financial crisis in 2008, as the impact of the stamp duty tax cut and undersupply of housing will keep prices from drastically falling. Affordability has been compromised for many weeks already. Unlike in the United States where many homeowners have refinanced to take advantage of very low interest rates in 2021, the UK has more than 2 million homeowners who will shift to new mortgage deals once their fixed-rate mortgages expire within two years. This means that mortgage payments will eat up a larger portion of households' real incomes, which have not kept pace with inflation this year. In addition, compounding pressure is felt by first-time buyers who are caught by the property market slowdown due to decelerating home sales and a shortage of available supply. But if potential buyers choose to stay in their rented homes for now, landlords who are squeezed by higher rates once they refinance will likely pass on the costs of more expensive mortgage to their renters’ monthly payments.