Londoners see buying power crash as mortgage rates remain high

Londoners have seen their buying power plummet more than anywhere else in the country thanks to rising mortgage rates, new research from Zoopla shows.

The average five-year fixed mortgage rate is around 4.8 per cent today for a new 75 per cent Loan-to-Value (LTV) mortgage, up from below 4 per cent in January.

A UK homebuyer who could afford a £200,000 mortgage at the beginning of the year, for example, can now borrow around £182,000 for the same monthly repayment, representing a nine per cent reduction in buying power.

Alternatively, to keep monthly repayments the same, a buyer would need to add £18,200 to their deposit on a property.

In London, where the average property costs almost twice as much as the UK average, this loss of buying power has a bigger effect. Buyers in the capital would need to add £35,500 to their deposit to buy the same home with the same monthly mortgage repayment.

This example assumes a 75 per cent LTV mortgage using a 27-year term for a five-year fixed-rate loan at 4.8 per cent now, versus 4 per cent in January.

The hit to buying power in the capital has a greater impact on first-time buyers, who often take out longer mortgages and larger loans compared to existing homeowners.

With affordability stretched by higher mortgage rates, some buyers have chosen to delay their purchases, causing the market to slow down. According to Zoopla, sales across the UK are down by six per cent year-on-year.

“House price growth is slowing to zero as borrowing costs remain high and uncertainty surrounds which taxes will be increased in the autumn budget,” said Tom Bill, Knight Frank’s head of UK residential research.

“Weakness in the labour market means the Bank of England is unlikely to hike rates any time soon, but almost six months into the Middle East conflict, mortgage rates are still around a percentage point higher than they were before it started.

“A seasonal bounce in activity may be more detectable in autumn than it was in spring as rates stabilise, but that will also depend on the extent of any pre-budget speculation, and overall we expect prices to be largely flat this year.”

In London, house prices were down by 1 per cent year-on-year in July, compared to -0.6 per cent in June. The average London property now costs £525,400.

Many of UK’s most expensive areas in the south have seen the biggest drops in value, while more affordable regions like the North West, Scotland and the North East have seen prices rise. Northern Ireland has seen the biggest growth in house prices, at 5.4 per cent.

Across the UK, the average house price has increased by just 0.9 per cent in the 12 months to July.

But according to Zoopla, there are signs that the market is beginning to change, as buyers return after the summer.

Despite a lower number of sales, searches for homes are now seven per cent higher than the same time last year – their strongest level for 12 months. In London, searches are up by 7.3 per cent.

“Many buyers have taken a ‘wait and see’ approach over the summer months in response to higher borrowing costs and political uncertainty,” says Richard Donnell, executive director at Zoopla.

“The low point for activity was mid-July around the time of the World Cup final. Since then, we have seen a steady increase in the number of people searching for a home, assessing their options ahead of the post-holiday rebound in sales market activity. This is a nationwide trend and the first time searches for homes are up across Britain this year.”

With mortgage rates still hovering around five per cent, affordability is still a concern, says Donnell, but a five per cent boost in listings across the UK is giving buyers more choice.

“Buyers have plenty of choice this autumn and will be able to make competitive bids for homes. Motivated sellers need to price carefully to attract interest and bids and seek the advice of local agents for the likely levels of demand and interest in their home as market conditions vary widely across the country.”