interest rates and house prices London

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With the expected announcement that interest rates will go up again today - what will that mean for house prices especially somewhere like London. We've only just bought our place but might need to move again so feeling quite worried now both that prices are going up all around us together with interest rates. Surely for a lot of people their mortgage will become a lot more expensive if both continue to rise

I think its the fear of what happens if when interest rates do go up. Mortgages in London are so high, I do wonder how many people can afford to pay the house prices if baseline interest rates go up to 3%. Our current mortgage is 400k and yes, rents are higher but so is house maintenance etc.

i'm not sure any impact will be seen so soon. People with big mortgages should still be able to take the hit, they just might not make so much money when it's time to sell. I wonder if more older people in bigger properties may sell up due to energy bills & assume some landlords may struggle.

I suppose the key thing to do is ensure your monthly mortgage commitments are a manageable proportion of your income.

My monthly mortgage will be 23% of my net salary. If push came to shove, I'd be comfortable with payments going up to 50%, and tightening elsewhere.

The trouble comes if monthly payments are say 60% of your take home, as you wouldn't easily be able to absorb a significant rate rise.

Regarding your point about older people downsizing from big family houses, while that would be great, I don't think it would realistically happen. Majority of people living in those type of houses are probably mortgage free, and living on decent private pensions combined with the state pension. So the cost of living increases are likely to bite, but would be manageable, particularly if they enjoy where they live.

The trouble comes if monthly payments are say 60% of your take home, as you wouldn't easily be able to absorb a significant rate rise.

it depends on the income though, 60% of 6k is easier to manage then 60% of 2.5k

@Starseeking just thinking as my parents are looking at downsizing due to energy costs & we have seen a few properties for sale that are being sold by downsizers. Lots of older people are asset rich but cash poor. The part of London I grew up in has many older people who were immigrants & had very normal jobs so not necessarily excellent private pensions. The area was rough but it gentrified beyond belief.

Interesting. Where do you live? We are oj SELondon and I reckon its same here

SW London

Agreed. However someone with a £2.5k net income isn't going to be living in a big family house, they'll more likely to be in a flat (at least in my area of London that would be the case).

Although I do know people with big loans from doing renovations & I guess the labour market may restrict/bonuses reduce

Agreed. However someone with a £2.5k net income isn't going to be living in a big family house, they'll more likely to be in a flat (at least in my area of London that would be the case).

I think they are more likely to be ftbs with higher LTV which can cause problems as someone with a house likely has a bigger mortgage but with 25% plus equity. A big family house is out of the budget for most where I am though unless you bought years ago. Flats where I am start at 650k.

but the prices haven't changed much for the last few years whereas 10 years ago people made 200/300k on that flat.

It all depends if the wages will track inflation. If, yes, having a large mortgage will be looked favourably since the inflation will effectively repay the borrowed amount on a relative basis, if not, we will see a squeeze and a deeper recession which will reduce affordability.

Many mortgage holders are on a fixed term and should be only gradually affected by rate rises, but new buyers won’t be able to borrow as much which should tame out downward pressure on prices where affordability was already stretched (London)

@Paulina23 - there is nothing to suggest that salaries will rise with inflation. The great majority have had a sub inflation pay increase and a tax increase. Inflation is also considerably higher than 7% at present, the measures used have changed since the 1970s and underestimate inflation very significantly.

@Starseeking - I can understand your logic in looking at rents vs mortgage costs. Of course, you do need to bear in mind that rates are very likely to continue to increase so the two may well balance out.

who decides if wages track inflation? is it market forces in terms of skills shortages? or unions? etc.

We've just put our flat on the market and it's interesting that all the viewings we've had have said it is overpriced - which is not the feedback we got less than a couple of months ago when we had a few off market viewings prior to tarting it up for sale.

I wouldn't mind, but there is so little coming on the market in the category we want to upsize to that prices there are still going up as far as I can tell so we're slightly stuck between a rock and hard place and we'll already be borrowing to the absolute limit of what we can to reach that so I'm nervous about interest rates as well. It's not an ideal time to be moving, but we really need the space, plus time is ticking on us age wise as well.

So historically employers and employees both expected wages to rise with inflation. But over years with inflation being so low that stopped to be the case. Not sure whether it will change now. Employers haven't factored in paying inflation rises in the same way as in the 70s or even 2000s

'who decides if wages track inflation? is it market forces in terms of skills shortages? or unions? etc.'

A combination of factors.

Trade unions are nowhere near as power as they were in the 70s and 80s. Wages have already risen in areas with skills shortages but that may change as we enter a recession and unemployment increases. Financial markets look in big trouble and tech shares have started to collapse (these are sectors that have been very high earning and successful of late). What seems very likely is that many businesses will fail and many workers will lose their jobs and so there may be more competition for low paid work in the fairly near future.

That’s interesting.

When we put our house on the market, property developers said we were overpriced, but couples/families didn’t. I think it depends who’s looking, the former want to buy cheap and rent out and make a tidy profit. Rather it went to a family, anyway! 🤞🏼We’ve had offers that have fallen through for a number of reasons, which is annoying but have kept firm on what we want for it.

Good areas in London just hold still in a recession & no one moves. Then they pick up again when things are better.

I read somewhere last night that 70% of buyers are looking for larger houses but 70% of new builds are flats....

Agree. A mixture of being reasonably open and not letting yourself get badgered by EAs.

The interest rate needs to rise significantly more than that to have any impact. I know it is four times higher than a few months ago but we are talking from a position of virtually zero. It needs to be around 5% IMO. There are still plenty of buyers in London including buyers from Hong Kong and the Middle East. Supply shortage is still a massive issue. There will always be a few people here and there who absolutely need to move in a hurry and will offer a bargain to get out sooner. However, everybody else, (including people like myself who would love to move but don't have to) are likely to take the scenic route and make sure they still get as much as possible (given the likely lack of flexibility further down the chain).