Will house prices fall sufficiently to offset the increase in interest rates

[rosetintedmemories2023]

For most of my adult life (I am 30), people have told me that it would be easier to buy if interest rates were higher as this would depress housing prices. I would then find it easier to upsize and FTB would find it easier to buy property provided they had a decent deposit. The only people who would lose out were investors and downsizers (and downsizers could probably afford to wait).

This doesn't seem to be happening; yes house prices are falling or at best stagnating in many areas. I think it was much easier in 2019 for me personally when we bought a 2 bed flat as there was a slight dip in london flat prices at that time due to brexit (and interest rates were low). I don't envy FTBs today.

Older mumsnetters who have experienced the 1990s house price crash, would love to know your thoughts esp if you bought and sold in London. Thanks.

We are hoping to buy soon. Our mortgage would be £300K over 40 years at 4.15% fixed for 5 years with a repayment of £1281. If that house drops in value by 20% and we have a mortgage now of 5.59% fixed for 5 years then the mortgage repayment would be £1253. So a 20% drop in house price but 1.5% increase in interest rates and it’s £30 a month cheaper. So no, it’s not going to make much difference and suddenly huge numbers of first time buyers will be getting on the market.

If its the same payment, it would still be better with a lower listed price as that would get eroded by inflation and maybe interest rates would fall in the medium to long term. But now I find that the higher interest is more than whatever you might save from the prices going down.

One of the key changes in recent decades is mortgage regulation which means lenders are obliged by law to work with their customers to make paying their mortgage affordable and avoid repossession wherever possible: offering payment holidays or a temporary interest-only product, extending the term to make monthly repayments lower etc. Which means we’re far less likely this time to see significant numbers of homeowners doing as they did in the 80s and 90s and simply defaulting if they were struggling with payments. That will prevent market flooding, and thus prices tumbling.

We will obviously see some drop in prices, particularly with the sorts of homes FTBers are most likely to buy and right at the top of the market, but I doubt it’s going to be the huge decreases some people seem to be hoping for.

20% of homes are now owned by BTL investors. only 1/3 of these investors own their properties outright. do the banks work with landlords to ensure their properties are not foreclosed on?

I'm an older Mumsnetters born in 1965.

The uk population the last time they counted was 18 million people more than the year I was born so no, I don't think house prices will come down.

Forget about home ownership - your flogging a dead horse. Look at other ways to invest.

The main pressure on house prices in the uk is lack of supply so while there may be dips from time to time in the long term house prices are only going to go up.

Obviously a lower list price is better because it’s a smaller amount to pay interest on. I’m mid 30s too but historically 5.59% isn’t a bad interest rate so it might not get lower than that. These numbers are also on a 20% deposit, which offers me a marginally better interest rate but many FTB aren’t getting 20% deposits together. House prices and interest rates don’t move in isolation, the interest rate has gone up as properties have gone down. If interest rates drop while prices are low, the people who will benefit are people with money already and can afford to make the move then. Then house prices quickly rise again.

I do own a home though... i thought i could be like my MIL and upsize in London during the slump in the 1990s (she was born in 1962).

The interest rate hasn't been high for even a year yet, a huge portion of people are still on fixes, we've not yet seen the impact of interest rates on houses prices, and won't for a little while I wouldn't have thought.

I think it's hard to say what will happen with BTL but I don't think we'll see the mass sales that many assume. In most cases, they will just pass on the increased mortgage costs to the tenant.

The tighter EPC rules that are planned to come in from 2025 are likely to prompt some sales but I can see the govt easing these tbh.

Reports today saying that there may be up to 35% drop in prices if rate goes to 7%.

Be careful what you wish for. For prices to drop significantly we would have to see people being forced to sell their homes. It is more likely the market will stall, people will decide not to sell if they can’t get what they think their property is worth.
Also as others have said we are a small over populated island with a limited supply of housing.
I think in 5 years prices will be the same or slightly higher than they are now.

there’s been a noticeable drop in houses coming onto the market in the past year where we are. Last year buying was horrible because you couldn’t get a viewing and everything was 10-50k over asking. This year it’s horrible because there’s nothing coming up and the ones that come up are similarly priced to last year, but interest rates are 5x last years

Inflation comes in waves. In the 70’s it lasted most of the decade and took Vlocker raising rates to 20% to put it under control.

Once recession hits then inflation will come down, but it may not be gone due to compounding of inflation through energy and wages.

At the moment it does indeed look like we will be heading to 7% but even then in the next inflationary wave that could go higher (only the governments can’t afford to pay their debts beyond that).

Quite simply it’s the supply of credit that drives house prices not the amount of supply (there will be plenty of supply when BTL increasingly sells off).

For 300 years the average interest rate has been 6%, and until 2008, house prices were x4/5 earnings. That’s now increased to x9/10. That is what will revert and it won’t be equal (north/south prices, city/rural). But as Ive stated for several years on here 30/40% on average. More in the South/SE and cities (like new build flats, share to buy etc).

I think eventually the prices will largely reflect the interest rate rises. We were looking to buy/upgrade and have a great deposit, but whereas a few months ago, we thought we could stretch to a 500k mortgage, the monthly repayments on it are now just too high, so our budget has reduced. We simply can’t pay what we would have been able to last year.

Although the interest rate takes time to filter through to existing mortgage holders, it is very direct when buying.

Sorry if this is a silly question but what do you mean by the govt wouldn’t be able to its debt above 7%? Does that mean it’s unlikely that the BoE would raise rates above that?

I also read about us being the only country in the G7 with inflation continuing to rise. Why do you think this is? Does this mean we’re having a slower turnaround than others? All factors (save brexit) are similar- the war, Russia, oil prices, covid..so I’m annoyed as to why we’re still so scuppered by it!

Yes, they will fall to what people can afford.

Because people can't pay more than they afford.

I think it really, really depends on the area. Places popular with families, good schools, buzzing high streets and good transport links will mostly hold their value. I think those are least likely to be affected (or at least crippled) by higher interest rates and redundancies.

Less desirable areas will definitely fall.

It seems the ultra rich will also be affected. I read somewhere (sorry, I can’t remember the source) that somewhere traditionally v expensive has already fallen by 15%. It might have been Westminster and Kensington, something like that.

If you want to upsize affordably, maybe keep your eye on the edges of the more desirable areas and their surrounds.

In terms of the number of people having to moving home, as well as lenders trying to stretch terms, giving payment holidays etc, I think a lot of middle class folk will temporarily get bailed out by the bank of mum and dad who would rather release equity from their mortgage free homes than see their kids downsize/lose their homes. And I think that’s likely to happen a LOT. I don’t think we will see that in the 200k < bracket, but for sure the 400k > demographic.

Remember, banks generally stress test 3% above whatever the current interest rate is. The government removed that as law last year, but they are still doing it.

There was a recent thread on here ‘at what % would your mortgage really become a problem’ and most people responded 8-10%.

Many people believe that house prices and interest rates are inversely linked, with interest rates being the independent variable, and house prices the dependent variable. According to this view, government policy and market conditions determine an interest rate, and house prices must inevitably move in the opposite direction.

I don't share that view. I think there is a relationship, but it is only one of many factors: The amount of money sloshing around the economy looking for a 'home' (sic); The proportion of the purchase price financed by debt; The job prospects and job security assumptions of the mortgagee; The attitude and needs of the seller. These factors are not necessarily inversely linked to interest rates. Or ... where there is a link, it has a significant lag and the effect is dampened. Which, in my view, makes the interest rate relationship to house prices less solid than many on here seem to think is the case.

The most significant factor is, in my view, the attitude of the vendor. Do they have any control over whether they sell or hold? What are the alternative opportunities they have for investing/spending the revenues from a sale? What are the tax implications of these opportunities? It can be a very good thing to sell a house at a lower price than it was bought for, but only under very specific conditions. Most people who only own the one house, and who need one house to live in, and who have borrowed heavily to pay for that house, do not have the options that an investor might have - and so they won't sell, regardless of what interest rates do. Only the lowest quality stock where the carry costs of continued ownership (e.g. ex-HMOs) are high will be put up for sale at fire-sale prices. The current owners of all the nice houses will sit tight and try and wait it out. Which means - anyone who wants to acquire a nice house for themselves will have to meet the expectations of the incumbent owner, and that is why house prices remain stubbornly high even when interest rates are rising.

Not if people can’t afford them. The BoE undertook a paper in 2019 that detailed that all of the rise in house prices that we have seen has been the function of low rates. I’d people can’t afford the price the price has to come down and that is what is happening now. Simples.

A stress test of 3% above the current rate 2y ago would be a total of 4%. Mortgage rates are at 6%. Anyone resetting from two years ago is hitting that.

Oh, sure. But hopefully when rates were that low, people may have been sensible enough to go for a five year fix.

But they weren’t…

Lots of the people on this thread are talking about people who have taken out their mortgages in the last five years as if they rule the market. I bought 16 years ago and have paid my mortgage off. I suspect those who bought recently and are therefore vulnerable make up a relatively small percentage of home owners.

I think you need to be a bit more patient, rate increases like we are seeing take time to affect market prices, and it WILL affect the prices noticeably, look how expensive housing is compared to wages! Completely out of sync. We have the winter coming and rate rises haven’t stopped yet.
Prices don’t “crash” overnight, they can take a year or two to materialise.
This is just the start!