Interest rates rises

[dancemonke]

How much are these going to affect house prices? I'm worried because my sister is about to buy (currently under offer - but it's a probate sale so is taking forever and they haven't agreed a fix yet) - and just feels like everything is properly about to tank. (She's not on here, otherwise she would be asking!). The rises that are now being projected are absolutely terrifying tbh. No one seems to be thinking these are short term rises either. If interest rates sit at - say - 5% more than they have been on a £300,000 mortgage for ten years - that's £150,000 more to pay (is this correct maths? 5% of £300,000 is £15,000 a year over ten years). It's unaffordable. And I know a LOT of people who are stretched and coming to the end of their terms and have absolutely no idea how they are going to pay the increase.

It’s not looking good is it?

I agree that the gaps between properties were impossible to close in the past 17,000 was a different league to 21,000 in the 70s.

I also remember hearing that our neighbours house had halved in value after he bought it for £85000 in the 80s. And I remember hearing lots of stories of keys been posted back through the letter boxes and flights to Oz.

Yes, it’s the sheer price of these houses now that has taken ordinary homes bought by ordinary people into a league previously inhabited by the wealthy and those who know how to manage/manipulate money.

Well you certainly can't have bog standard homes costing hundreds of thousands & high interest rates so something has to give.

Exactly. Plus there is the added factor of very high inflation which shows no signs of abating. Food in particular seems to have risen a lot in the last month.

@toomychtiss

i was thinking more that those families will have big standard sAlaries in many cases and that is the issue - keeping a home, bills, insurances, maintenance, etc are all costs that don’t really go away and are dependent on outside forces (cost of goods and labour if you need your roof fixed, for example). With the energy crisis, too I think many might prefer a smaller, simpler home.

Bog standard not big standard

Well the energy bills has certainly made me think I never want a large detached house!

They were high for around 3 - 4 years I think but would need to dig out my old mortgage statements..
I note your points and of course everything is relative.
I was making the point that the difference of £4000 was huge..it was like the next big step up..whereas now £50,000 - £100,000 is the next step up..but also £3000ish was a fair average salary!!

House prices will fall. They cannot defy the gravity of rising interest rates. Current expectations are that the BoE's base rate will go to 6% by August next year (these expectations reflect the views of banks and other sophisticated fixed income market participants as expressed through the pricing of swap rates, not my own view). With a base rate of 6%, you would expect to see mortgage rates of 7% or more. Mortgage rates at these levels will have a massive impact on pricing.

Imagine a prospective buyer. Earlier this year they could borrow £200k at 3% and spend £948 per month on their borrowing (assuming capital repayment over 25 years). With a mortgage rate of 7%, their borrowing has to fall to £134k to keep monthly repayments at £948. That prospective buyer has just seen their budget fall by 33% if they want to keep their monthly mortgage payments affordable. Thus, demand falls.

On the other side of the equation, imagine a homeowner. They borrowed £200k at 3% and are currently spending £948 per month on their borrowing. Their fixed rate period expires next year when their mortgage rate will jump to 7% and their monthly mortgage payments rise to £1,414, a 50% increase. They can't keep up with these payments and end up being a forced seller of their property at a "fire sale" price. This further drives down prices.

I think things could get pretty ugly. The cheaper end of the market, especially typical first time buyer homes, will be hardest hit as buyers and owners of those properties have high LTVs and thus are more sensitive to rising interest rates. The lux end of the market (ie prime London) will be supported by lower LTVs, weak Sterling (which attracts foreign buyers) and the reduction in the additional rate of income tax from 45% to 40% (which will give additional rate tax payers more money with which to service borrowing costs).

I would not press ahead with a house purchase right now if I could avoid it. Wait till spring/summer next year when the path of interest rates may be a little clearer.

In the next day or two I'll dig out my old mortgage statements showing the interest rates over a number of years if anyone's interested!

www.economicshelp.org/blog/1485/interest-rates/historical-real-interest-rate/

there's historic data here

They bailed us out with the energy prices because of boomers in their massive houses

Don't talk such tripe.

Also when people talk of the past & inflation seen in the 70s they often overlook the huge growth in salaries that occurred during that time.

Well that’s just fucking bonkers advice. No one can get a house as cheap as 3x their salary these days. I guess you were lucky enough to buy a house for £40k decades ago and are patting yourself on the back at how clever you are being mortgage free…..

I started a thread about this before Truss decided to cap the energy prices. My theory was that people would want smaller homes in cities and towns near transport links so you don't need to run a car and can save money- reverse of suburbanization. Most people on that thread said they would still want their massive house with big garden because it was cheaper to entertain children in that big garden. My thought was that it wasn't such a simple choice. In 2019, I was choosing between a 2 bed flat in London and a 2 bed house in the home counties. Both were the same price really, except you would have to pay £8000 in commuter fares for both of us and also run a car with the home counties option while staying in London meant just paying zone 3 tube fares (and my DH ended up cycling to work and we have no car)..the home counties option would have left me with lower disposable income to weather interest rate rises as commuter fares/running a car was so much higher than service charges. Most people with my budget chose the home counties option as at that time inflation was low.... But now inflation is 10%, petrol will rise in price due to pound crashing, I suspect the numbers would stack up more favourably in terms of living near to work and shops in a simpler property.

I bought my first house in the 90s and fixed my mortgage for five years at 7.4% which at the time was a good deal. Interest rates had been higher than that for a significant period.

You’re partly right. My first house was 32k. We moved once to a 3 bed semi. But people I know my age have moved more than once and live in big 4 bed detached houses with the resulting big mortgage. They also bought their first house cheap at a similar time to me. But taking on such big debt always worried me because I was concerned about what looks like is now unfolding. I’ve had people sneer at me for my house in the past…..but yeah my remaining mortgage is £7000 which I will pay off when the mortgage fix comes to an end next year.

my point is that the 3x salary advice was standard for decades. As a country we have been shafted by property prices rising to a level which would be unaffordable when interest rates rise. Interest rates were never going to stay as low as what they have been.

@onthefencesitter In that scenario & I'm basing this on having dc the logical thing to do would be too much to the z4/5. Schools tend to be good, bigger houses, transport not so expensive as moving out. I also think with the way the market is, harder to build equity, stamp duty costs, older Ftbs more people will just skip the flat stage.

But that's the point. If you couldn't borrow 5x joint salary, or even more in the days of self certification, prices wouldn't have risen so much because people wouldn't have been able to borrow sufficient money to pay higher prices, so they wouldn't have increased so much. Prices are limited by what people are allowed to borrow and can afford to pay.

Allowing higher borrowing has been a main driver in increasing prices. In a way, it wasn't helpful to count both partners salaries when a couple buy together, because that also fuelled house price growth and made it much harder for people to buy on their own.

If they had kept it as only counting one salary in a couple for lending purposes, prices wouldn't have increased so much. It's not anti feminist to say that, just an unintended consequence.

Whether you have a couple or a single person, and regardless of the sexes of the parties involved, if you simply count the highest salary for mortgage lending purposes, it would make it easier for people to buy on their own, because they're not competing against couples, and also makes it that a couple doesn't need both parties to keep working full time to pay the mortgage, so protection against job loss and also makes things easier for those who have children and need to consider childcare costs, SAHP or PT working.

It's been the same for credit cards. When I got my first credit card in the 1980s, the minimum payment was 5% of the balance. Over time that got reduced to 1%, and at one stage, minimum payments were less than the interest charged, so you could pay a tiny amount and the debt kept growing, even if you stopped spending on the card.

Now this didn't make it more affordable to use credit cards, or easier to manage, all it did was have people get into bigger debt before they realised they were in trouble, which tends to happen when people stop being able to afford the minimum payment. If this is 5% and you can afford £100 pm, when you pass this point, you're in £2000 of debt. But if the minimum is 1% you have £10k of debt when you stop being able to afford the £100 minimum payment, and then the interest charged and earned by the lender is far far higher.

The whole system has been set up to trap ordinary people into debt, because that's what makes a lot of money for the 1%.

Interesting thoughts. I could see there being a supply of houses as landlords release them because why would you want to have all the hassle of a buy to let when you could get 5 or 6% return from cash

I could only afford a flat in z4/5 with £392k at that time. And that was with a 15% deposit and 0.75% base rate. I was 27 years old so relatively younger FTB. This mindset of moving to the biggest house to save on stamp duty and minimizing moves is still based on the mindset of borrowing an extra £50k on 1% interest rate. And yes that would probably get you a house in z4/5 south or east london as opposed to a z3 flat. When an extra £50k would cost you 10% in interest its a different mindset. My MIL bought a 1 bed flat in z3 in 1989 when interest rates were 8%. I asked her why she didn't buy a 2 bed to future proof she just said she couldn't afford it! She wasn't that young either, she was 28 years old and at that time people had kids younger than they do now.They just had 3 kids in that 1 bed flat until they could afford to move. Basically you just buy what is the lowest base cost at that time even if it works out more expensive in the long run or you rent.

And 3 years on, I am still looking at 3 bed flats to move on, preferably in z3 but not opposed to z4. It's still cheaper than a house in z5 most of the time esp when comparing in terms of square footage. Cos in the time of high interest rates, it's better to just take on less debt and fulfil minimum requirements and be happy with less. Prioritize wants. For me what is essential is having that extra bedroom for my pets/desk . The rest is just not worth getting into more debt for if mortgage interest rates are 10%.

If the rates increase it will be short term, not ten or twenty years. If she can afford it for say six months she’s fine

I thinkrates will rise and stay....I am not sure we will see such low interest rates again

I wish it was only going to be six months but I fear it will take a lot longer than that to get the economy on an even keel. Especially with stupid Tory policies of cutting tax and borrowing more. People might feel immediately better off but at what long term cost?