Rising mortgage rates slash the house prices buyers can afford

British homebuyers need to lower their expectations, raise a little more cash, or get sellers to lower their prices.

The dramatic spike in mortgage rates has severely affected the purchasing power of buyers, who will find that the amount they can afford in monthly payments is much less than a year – or even a month – ago.

Since most people’s earnings have not increased substantially, the decrease in the amount you can borrow based on what you can afford each month will have a significant impact on home buying ambitions.

A homebuyer who needs a £200,000 mortgage over 25 years to buy a £270,000 property would find that the best five-year flat rates on the market right now are around 5.4 percent and monthly payments are £1,215 to be.

A year ago, that same buyer would have been looking at five-year solutions at 1.5 percent, with monthly payments of £200,000 of about £800.

Just a month ago, the best comparable five-year repairs were much lower at around 3.5 percent and monthly payments of £200,000 would have been around £1,000.

Turn this round around and the figures get even more grim.

At current interest rates, the purchasing power of our theoretical homebuyer’s £800 monthly payments falls from a £200,000 mortgage a year ago to £130,000 today.

Add their £70,000 deposit or equity to the mix and instead of a £270,000 property they can now afford a £200,000 house.

Even if you compare things to just a month ago, things have changed significantly. With monthly payments of £1,000 in September for a £200,000 loan, our home buyers now only get a £165,000 mortgage, which with their down payment adds up to £235,000 property.

Based on the same monthly payments and deposits, a mortgaged homebuyer could afford a home that is 13 percent cheaper than at the beginning of September — and 25 percent cheaper than a year ago.

Buyers higher up the cost ladder see an even more pronounced monetary difference in the price they can pay for the same mortgage payments.

For someone taking out a £400,000 mortgage with a 25-year term – something much more common in Britain’s high house prices than many might think – to buy a £700,000 property, the monthly payments with a fixed rate of five years could have been £1,600 a year ago.

A month ago, the monthly payments on that loan would have been £2,000, but now they are £2,430.

Turn that around and the purchasing power of $1,600 in monthly payments drops from a $400,000 mortgage a year ago to $265,000 today.

All else being equal, that’s the difference between being able to afford a £700,000 house then and a £565,000 house now.

You can see the rates you would get and how much it would cost you to buy now with our mortgage calculation.

Overall, there has been a significant drop in the amount buyers can afford to spend without finding much more money each month and that has yet to be reflected in the regular real estate market statistics we see.

According to the Nationwide Building Society, annual house price inflation is still high at 9.5 percent, and house prices were stable in September.

That data is based on mortgage approvals and thus more current than Land Registry/ONS figures released with a few months’ delay, but even then it usually takes a while for the price drops to trickle down to the Nationwide or Halifax indices. Some economists are already predicting a fall in house prices.

My anecdotal armchair property survey is flashing red for home prices. Over the past month, Rightmove’s ‘latest list’ results for my environment have shown an increasing number of ‘reduced’ tags.

While writing this column, I took a look at what happened this week. As of Monday, there are 27 properties in Rightmove’s ‘latest listing’ in my city: of them, seven are new to the market and one has returned to the market after being under-listed, but 19 of them have prices lowered.

A daring home seller has decided to go against the trend and raise his asking price.

Sellers are cutting their initial asking prices about 5 to 10 percent as they drive expectations down and try to stay ahead of the curve.

When it comes to taking the temperature of the market, this is telling, but what remains to be seen is how much effect a new era of much more expensive mortgages will have on home prices.

Not all buyers are affected, about 35 percent of home purchases are made by cash buyers who don’t have to worry about something as inconvenient as a mortgage.

Nevertheless, while they may not have to obscure the door of the bank or mortgage lender to make their purchase, they may have to sell to someone who does.

Meanwhile, even the home seller’s holy grail, the chain-free cash buyer, isn’t completely immune.

They can see what’s going on in the world and most don’t get into the position of shelling out hundreds of thousands of pounds to buy a property without being at least a little careful with their money.

At the same time, energy and other household bills have skyrocketed – though you don’t have to tell me.

Grocery stores are 14 percent more expensive than a year ago, the ONS says, and people everywhere seem to be pushing prices up.

Meanwhile, even with Liz Truss’s £2,500 energy price freeze, the average household gas and electricity bill is roughly double its early 2022 level.

For the entire real estate sector panglossian Thinking – where everything is for the best in this best possible world, as with Voltaire’s perennially optimistic philosopher in Candide – it’s hard to imagine a scenario where the dramatic jump in new mortgage costs and household bills doesn’t cool the market.

If it keeps house prices in check, which won’t be a bad thing, rampant property inflation during the pandemic boom has made homes more expensive than ever compared to wages and that’s nothing to celebrate.

The problem is that the rise in mortgage rates has now been so dramatic that it will cause severe financial pain for some, especially the generation of heavy-mortgaged homeowners in their 40s, 30s and 20s.

But whether rampant real estate inflation will stop is not the question people are asking, they want to know whether house prices will fall.

However, the only answer to such questions is, “Who knows?”

Most thought that house prices would face a potentially sharp and prolonged decline after the initial freeze in the property market as we went into lockdown early in the Covid pandemic; instead, after a brief wobble, we got a boom that contributed 20 percent.

That means any forecasting should be taken with a grain of salt, especially bearing in mind that the opposite of what common sense says should happen will often happen in the UK property market.

Ultimately, the UK property market has been sustained for years by allowing people to borrow at ever lower rates to pay ever higher prices. Mortgage rates have taken a dramatic turn this year that should eventually change the game.

Even if we have already reached the peak for mortgage rates – which we may reach earlier than the peak of the base rate amid the market thunder, it is difficult to envision a scenario where money that becomes much more expensive house prices do not dent.