Yahoo Finance London house prices will fall 10pc by 2024
London house prices will fall by 10pc in the next two years as its property market bears the brunt of the cost of living crisis.
Capital Economics, an analyst, has forecast property values in London will fall by a tenth over 2023 and 2024 compared with a 5pc drop across the country.
House price growth in the city has returned to form since the pandemic wiped out demand for urban homes. However, Capital Economics said the market was due reckoning in the coming years.
Property values would fall 6pc in 2023 and a further 4pc the next year. The South East of England is expected to suffer a similar fate, with prices falling by 4pc and 3pc.
It has been notoriously difficult to join London’s property ladder – the city is the only region in the country where the number of first-time buyers has not more than doubled in the past decade, instead rising by 82pc. The vast majority of buyers in the capital require a mortgage and sizeable savings for a deposit, leaving them uniquely susceptible to inflation and rising interest rates.
It is because affordability is already so stretched that it will be the first housing domino to fall as the cost of living crisis bites.
Costlier mortgages will cripple buyers
Last week the Bank of England increased the Bank Rate from 0.75pc to 1pc, the highest level in 13 years, as it scrambled to contain rampant inflation. The rise will not be the last and Capital Economics has forecast the Bank Rate to hit 3pc by 2023.
Almost all buyers in London purchase with a mortgage, which will soon become increasingly expensive to service. Of the 20 locations with the least cash buyers in the country, 13 are London boroughs, according to analysis by estate agency Hamptons.
In Barking and Dagenham and Waltham Forest 90pc of buyers last year had to use a mortgage. If the Bank Rate rose to 3pc as predicted, borrowers taking out a loan in Barking and Dagenham would pay £413 more per month versus taking out a loan now. Those in Waltham Forest would pay £618 more.
Andrew Wishart, of Capital Economics, added: "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, especially those joining the property ladder for the first time.
David Fell, of Hamptons, said: "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."
Perversely, 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 do charge 3.35pc.
If homeowners are forced to sell as they can no longer 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, said: "Affordability in the capital was already stretched – the recent rapid price growth we’ve seen has made it a lot worse."
Take home pay is disappearing
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. This will further stretch 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 soared alongside controversial tax rises in the form of 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.
