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.

You seem to be from the 'in denial' crowd!

if the main bulk of the market can’t be involved in any chains/pyramid.
we see a reduction in prices until those buyers can support the pyramid.

Prices will fall until affordability is met, we are currently way off and have 2+ years continuation of adjustment/decline ahead unless something external dramatically changes. This is set in for a while.

Perhaps you didn't see my other post where i was saying things are shit and just quoting a reply to a specific comment 🤔

Purchase prices go up, and go down. Interest rates go up and go down. Purchase multiples go up and go down. But one thing is constant, most people initially spend about 30% on their monthly nett income paying their mortgage. In the 80s, 90s, interest rates and payments were high, and house prices lower. As interest rates dropped, interest payments fell, but house prices rose as a consequence. As interest rates now rise the opposite will happen. But unless you are sitting one a huge pile of cash, "affordability" will stay the same, and the same people will buy the same houses, using the same proportion of their nett monthly income.

Still wrote the comment above too right?
You seem to essentially be saying similar to Rishi, it's all tough but if we hold our nerve, it will be fine or I can make adjustments so I assume everyone else can too.
I think people who think this are in denial.
Time will tell, I guess.

Not necessarily.

The issues of 2008 forced a price crash. But this didnt make it easier or cheaper to buy for anyone who couldn't stump up cash to do so.

Lenders tightened up on who was allowed to borrow in a big way. This will be especially true if we see a lot of repossessions. Why? Because legally banks must offset every pound they lend with savings or assets to protect themselves from collapsing. More repossessions means that they must protect themselves more thus borrowing becomes harder on top of higher interest rates.

And whilst you might see a lot more repossessions there will be another phenomenon. People with houses in negative equity who can't move who previously might have been able to. Or home owners who can't move because they are trapped on the mortgage they have and can't remortgage so also can't move. They will be just about paying bills but stuck in something of middle class poverty trap on the brink of losing everything and only just affording to eat.

People don't like to move when house prices drop unless they absolutely have to. Especially if this means they lose equity. If people are unable to move because of lending restrictions then you have the problem with issues with supply.

This all adds up to a possible lack of liquidity in the market where there is still very few properties coming onto the market which actually means the bottom can't fall out of the market because there is still high demand which outstrips supply.

The 2008 crash saw very localised patterns emerge. So places which were deemed 'less desirable' saw the biggest falls and took longest to recover.

Defaults on rental mortgages / landlords selling up won't necessarily help matters due to the sheer demand for cheap properties or rentals.

There is also something of a lack of suitable mid tier properties due to builders focusing on new builds and the 'executive detatched' which has massively distorted the market.

There is already something of a pancake effect where FTB properties and second tier properties are somewhat over inflated in price because of demand and an inability to move up the ladder due to sheer cost. That's not going to change with a tightening on lending.

More people may wish to downsize at the prospect of cheaper properties too but this only drives up demand and keeps the price of middle tier high.

Where the problems are more likely to be apparent is the top end of the market - demand for the top tier of properties will go through the floor and be harder to sell - but people aren't going to downsize if the price of smaller properties is inflated by demand as it's not worth doing. These larger properties won't totally crash as they will retain a base line value purely for the amount of land they retain but will get harder to shift especially if more become available. Dividing properties or multi generational living is liable to increase for this reason.

Certainly around here I can't see that there's going to be a mass of houses appear on the market. In the last five years the number of people moving has dropped massively so there just are fewer houses for sale. That means the second a reasonably priced 3 bed family house comes up on the market it's gone in days. And the price isn't going to slide for that reason.

Down the road in less desirable areas there will be different patterns on this theme.

Bottom line - people still won't be able to afford big houses and there are too many people chasing too few FTB and mid tier houses for prices to slide too far. They will drop, but there won't be huge crashes. People won't be able to afford more in relative terms because lending with tighten.

The only real beneficiaries are cash buyers who get more for their money. Everyone else is a different variation on screwed

Yep.

House prices need unpicking from affordability.

The current issue with housing is affordability over prices.

There has been an affordability crunch coming for some time.

There is significant talk of the danger of the BoE overcooking interest rate rises - and that issues in the UK are being driven more by labour shortages (including from earlier retirement) than directly from inflation.

If the BoE overcooked things the danger is it causes an affordability crisis. That doesn't mean a crash in housing prices.

It's not easy to know which way to jump right now, and I feel it won't be clear for a year or more. We plan to relocate for retirement, out of one of the UK's retirement hotspots, but we have adult DC still at home. The snapshot view from the southwest FWIW...

This house (we've been here over 25 years) accommodates us all comfortably but is at the high end of affordability for the local market. We could split it more evenly, into two apartments, but that doesn't address the location issues. When DC move on, we hope the bank of MumnDad will deliver a sensible boost to the deposit being squirrelled away.

However, there's not much that appeals on the market right now, because everyone is sitting tight to wait and see too.

It seems unlikely that we shall see a return to the early 1990s property crisis, because the mortgage market is more closely regulated, but nobody could wish for that pain again. The house DH bought in 1988 took nine years to sell and he lost 15%, but we were just able to buy the house we wanted (two incomes, no family). During the GFC 2008 property crisis, we were settled and so sat it out, but prices dropped back a bit, and then soared when everyone wanted space during the pandemic. Where we are shot up 25-30%, and prices are falling back now -- but not as fast as they went up.

'If the BoE overcooked things the danger is it causes an affordability crisis. That doesn't mean a crash in housing prices.'
I don't like the term crash but it does mean a significant fall over a period especially when combined with falling real incomes, v high inflation and lenders tightening up on lending. Reduced affordability= falling house prices which is exactly what is happening now. Sure it will vary from area to area and between different types of housing. Already, this year supply is markedly up in most areas though and most of it isn't selling fast.

Yep. Prices never crash - they slide over a long time. The market is like a super-tanker - the speed is so slow that the change in direction is barely perceptible. But you always see where they end up.

Separately, someone above mentioned a 40 year mortgage. No, please don't, if you need a term greater than 25 years then you are paying too much. Just because you can, doesn't make it right.

..... got side-tracked. In my area the number of homes for sale has increased 3 fold over the last 18 months. Increased supply inevitably pulls prices down.

40 year mortgages do sound horrendous to those of us used to 25 year mortgages.
But I’m not sure 25 year mortgages are realistic for everyone these days. I know my daughter has a 33 year mortgage which is not optimal. But it was her way of making the repayments realistic for her to manage on her own. Seeing as she was buying in an expensive city and knows that her salary will be increasing over the years with career progression. She will start overpaying when she can and reduce the term that way, if she stays there long term.

Unfortunately, it was easy and cheap credit, and daft mortgage schemes like these, that drove prices up so wildly. I feel sorry for those people duped into over-paying as a result of easy funds.

Nevertheless recent home buyers have had to make difficult choices and while for us 25 years is a normal mortgage term in the UK, that is not the norm in many other places or indeed in the UK now for FTBs it seems.

According to the Financial Conduct Authority, two thirds of first-time buyer mortgages have terms that go beyond 25 years. In 2006, it was just one third. This has led to the average mortgage term rising to 30 years

https://ccameron.co.uk/hub-post/what-is-the-best-term-for-a-first-time-buyer/#:~:text=According%20to%20the%20Financial%20Conduct,and%20up%20to%2040%20years.

Oh yes, I know it's been happening. But they (FCA/BoE/Gov) must have realised that it was unsustainable. They only had to look at the inter-generational mortgage debacle in Japan to see the likely outcome.

The difficult choice that FTB's should have been making, if they felt compelled to buy, was to buy in a cheaper area or buy a smaller home. This would ensure that they could comfortably maintain a 25 year mortgage.

When my son bought his first home 5 years ago, I almost convinced him to take out a 15 year mortgage for a few hundred a month more, but I failed! Luckily, I did convince him to take out a 10 year fix at around 2%. One out of two 'aint bad, as the old song didn't go.

Absolutely.
Just another attempt by the financial industry to keep the debt based Ponzi going. This isn't sustainable, anyone can see that. What happens when those with 35 year terms become ill or need to retire in their late 60s/ early 70s? People are not contributing to pensions/ making early withdrawals to pay mortgages already and have been for a while. What happens to these people in 30 years?

I agree that mortgages over 25 years should be avoided like the plague. It doesn't give you any wiggle room to extend the term if rates go up, or circumstances change. You also pay a shedload more interest.

Better to buy a smaller home than get a mortgage over 25 years I think.

Even better to not have rocket boosted prices over the last 25 years so that people could afford them with reasonable terms. Sadly that ship has sailed!

A 10 year fix at 2% was indeed well advised. At a certain point he may have felt he was paying too much interest(!) but I'm sure he's grateful now!

Daughter couldn't have bought any smaller as it was already only a 1 bed flat. It's true she could have bought outside London (as we urged her to do) but people never do want to move away from where their job and social life is, do they? Or accept all their parents advice for that matter.

I think it's ok (though not great) for FTBs to take out a mortgage up to 35 years as long as they have a plan to reduce the term through future bonuses/salary increases etc. Rents in London are even more astronomical than mortgages, so I see it as the lesser of two evils. She wasn't prepared to live at home in her 30s and I don't blame her.

Just because someone is taking out a 30 or 35 year mortgage in their 30s say, it doesn't follow that they aren't also contributing to a good pension scheme. Most younger people will be auto enrolled onto a company pension scheme these days, and if anyone chooses not to take out a company or private pension scheme then they are storing up trouble regardless of whether they are buying or renting. Unless they have an alternative plan for their old age.

We had a 40 year mortgage but overpay an extra £1250 per month in additional to the £1020 mortgage. Younger people may have stuff like childcare fees which are not forever, it's better for them to continue working and increasing their income and then this would be what enables them to pay back their mortgage.

What's the difference between having a 25 year term and a ,40 year term but you faithfully overpay £1250 per month (more than your mortgage term). At least if you lose your job, it's a lot easier to pay the smaller amount. Or if you need to pay expensive childcare in the short term

Yeah I agree, many young people have expenses which mean they will have much more disposable income further down the line. Childcare being the main example.

We only had a 25 year mortgage “ back in the day” but we definitely overstretched ourselves on paper. We had to in order to buy a decent property where our jobs were. We eventually found we had a lot more disposable income and could actually afford the mortgage we had after childcare costs reduced and salaries increased.

@rosetintedmemories2023 I hope the longer term and overpay when you can is a good idea as I've done it too! Personally I found it really helpful building savings for a rainy day and having as much flex as possible in my budget rather than being committed to a massive chunk of my wages going on one thing.