London asking prices are rising once again – despite homeowners facing the highest mortgage costs for more than a decade.
The combination of London’s high house prices and increasing mortgage rates should mean an even greater squeeze for property values there as demand drops, according to conventional logic.
Indeed, this seemed to be the case when mortgage rates spiked towards the end of last year, in the aftermath of the mini-budget.
London asking prices fell from a peak of £695,642 in October 2022 to £667,587 in January this year, according to Rightmove.
But prices now appear to be heading upwards again. Since the start of the year, the average asking price for a London home has risen by 2 per cent, from £667,587 to £680,806.
So far this year, prices in the capital are even rising faster than in many parts of the country. On average, asking prices have only risen 0.8 per cent across the UK as a whole during that same period.
Heading up: Since the start of the year, the average asking price in London has risen 2 per cent, according to Rightmove
On the ground, London-based estate agents also claim the housing market is still buoyant.
The average London seller sold their home for 97.5 per cent of the asking price in February, according to data from estate agent Hamptons.
This is higher than the 97.4 per cent recorded by Hamptons in February last year and the 97.1 per cent in February 2019.
London estate agent Chestertons says buyers remained undeterred in February, with a 3 per cent uplift in viewings compared to the same month last year.
At the same time it says it had 17 per cent fewer sellers entering the market, compared to February 2022.
The mortgage squeeze
Property experts say that demand is still high, despite mortgage rates hitting levels not seen since the aftermath of the 2008 financial crisis.
Average two-year fixed rate mortgages are currently the same as they were at the start of 2009, according to Moneyfacts data, while five-year fixed rates remain as high as they were in 2011.
Mortgage rates have almost doubled in a year, adding hundreds of pounds to monthly payments for prospective home buyers.
The average London property costs £680,000, according to Rightmove. Someone buying such a home with a 15 per cent deposit (£102,000) can secure a five-year fixed mortgage rate of 4.65 per cent now, according to Rightmove’s analysis, compared to 2.48 per cent this time last year.
This means monthly costs will have jumped from £2,587 this time last year to £3,262 now, for someone repaying the mortgage over a 25-year term.
Mortgage rates spiked in Autumn 2022 following the economic chaos after the mini-Budget, but have moved lower since.
Cash buyers help keep London afloat
High mortgage rates and house prices should lead to property values falling – so why is this not happening in London, where homes are the most expensive?
One reason is the high proportion of cash buyers operating within the London market.
Aneisha Beveridge, head of research at Hamptons, said: ‘Given that most sellers have benefitted from significant house price growth over the long-term, around 40 per cent of London buyers are purchasing with cash – the highest proportion of any region in Great Britain.
‘This insulates them a little better from higher mortgage rates. This is particularly true in prime central London where most buyers are cash-rich and are buying properties to hold for the long term.
‘The suburban markets are likely to be a little more vulnerable, given that households tend to be more indebted and more likely to be making needs-based moves.’
High demand pumps up prices
London house prices are also being kept high as demand outstrips supply.
For example, Rightmove said the number of available homes in London is 14 per cent down on the number of available homes recorded in February 2019, prior to the pandemic.
Meanwhile buyer demand is holding up, despite all the economic headwinds consumers are facing. Rightmove said this demand is 10 per cent ahead of where it was in February 2019, for example.
Chestertons said it is seeing a limited number of properties coming onto the market in March and April, leaving many house hunters frustrated.
Matthew Thompson, head of sales at Chestertons, said: ‘The capital continues to experience a chronic undersupply of suitable housing, particularly as demand has remained strong since the start of 2023 with more buyers booking in viewings.
‘Simultaneously, the number of offers being withdrawn has decreased by 11 per cent which indicates that there are fewer window shoppers and more serious buyers entering the market.’
Thompson said one reason behind the fall in homeowners wanting to sell up has been the fact that mortgage rates have been falling slightly in recent months – though a period of cheaper mortgage prices may now be over.
What is the difference between asking and sale prices – and why does it matter?
- The asking price is what a property is listed for, while sale price is what it ultimately sells for
- Typically the average asking price tends to be higher than the average sale price
- Many sneer at asking prices as a result, saying these are too variable to use to judge property market trends
- But asking prices have a huge advantage – they give a snapshot of what is happening in real time
- Other house prices indices, such as Nationwide and Halifax, relate to approved mortgage applications which means there is a time lag in the data
- The Land Registry’s house price index is based on sold prices, which means there is an even bigger time lag
This has led property owners who might have felt forced to sell up to keep their homes instead.
Thompson added: ‘The London property market slowed down at the end of last year in reaction to the Bank of England increasing interest rates.
‘These rates have started to come down since the beginning of 2023, and we are seeing stronger competition amongst mortgage lenders which means that rates are now only slightly higher than before the September 2022 mini-Budget.
‘This has relieved some pressure on households with fixed-rate mortgages coming up for renewal.
‘As a result, some homeowners who had considered downsizing to lower costs may have been able to get another fixed-rate mortgage at an affordable rate – meaning they are under less pressure to sell.’
Henry Pryor, a professional buying agent says that he is seeing a similar story play out in the capital.
‘In terms of the London market we’re finding that stock is still short,’ he said.
‘We’re missing about 30 per cent of what would usually be for sale.
If it’s good then it’s selling
Henry Pryor, buying agent
‘If it’s good then it’s selling, but unlike last year if it isn’t quite right then it’s not shifting.
‘Prices seem to be holding up, no sign of them slipping yet.
‘There is still lots of demand – I’ve been viewing flats and houses with clients every Saturday so far this year and I’m usually finding that there are other buyers looking round with us. One house in Highbury we were there with five other couples.’
Soaring rates means lower house prices? Higher mortgage rates should cause house prices to fall this year, but this has not yet happened
Where in London are house prices strongest?
London property prices don’t just vary dramatically from borough to borough but also from road to road.
Asking prices in one location might be going up when only a mile away in another location, or even just round the corner, asking prices are falling.
For example, the London borough of Camden has seen average asking prices rise by 13.4 per cent over the past 12 months. Barnet, Islington and Sutton have also recorded strong price growth during this time.
However, according to Rightmove, average asking prices in Kensington and Chelsea are down by 1.8 per cent year-on-year, while prices in Richmond-upon-Thames are also slightly down.
Tim Bannister, a property expert at Rightmove said: ‘Local areas and parts of London are likely to fare differently from one another depending on the types of property available and the desirability of the exact location.
‘We’re seeing higher demand and fewer properties available in London compared with 2019, and for buyers looking to move in London it will be key to focus on the areas and streets they are interested in and speak to a local agent there to get the expert insight on that local market.’
The outlook for central London, where prices are highest, is also looking up, according to London buying agency Eccord.
The firm said it has seen rise of almost 20 per cent year-on-year in clients searching for a London home.
Jo Eccles, founder and managing director of Eccord, said: ‘Buyers were hesitant in the first six weeks of the year, taking their time to make decisions, with few new transactions coming through.
‘But we’ve seen a noticeable shift in the last fortnight, with more than £50 million of new buyer enquiries, many of them seasonal, driven by recent bonus payments and offers of places being made at London’s top secondary schools.
‘The performance of the prime London market has now clearly diverged from the wider London market.
‘Activity is underpinned by cash purchases, favourable exchange rates and discretionary sellers who can afford to hold out or withdraw their property if they don’t get the price they want.’
What does the rest of the year hold for house prices?
While London property values appear to be broadly holding up, prices are not expected to boom anytime soon.
Chestertons is predicting that London prices will fall slightly this year. It says prices across England and Wales will drop by around 1 per cent, compared to a drop of 3.2 per cent in London.
It says the capital will then lead the recovery in 2024, with prices rebounding by 9 per cent, compared to a smaller increase nationally.
Sebastian Verity, head of research at Chestertons, said: ‘As we are approaching Spring, which is known as the busiest period for the property market, and the Bank of England shared a more positive view on the economy, we are expecting more sellers to enter the market.
‘This increase in properties being put up for sale will inevitably lead to a more balanced market environment and allow buyers to negotiate the asking price to a certain degree.’
Chestertons is predicting that London prices will fall slightly this year but will then lead the recovery in 2024.
Hamptons is also predicting London house prices to remain somewhat flat this year.
Aneisha Beveridge of Hamptons adds: ‘We expect house price growth in the capital to continue decelerating throughout 2023. However, we aren’t expecting big price falls.
‘Sentiment seems to have improved since the new year and mortgage rates have come down from last years highs.
‘While affordability is more stretched for buyers, which will certainly weigh on price growth, most households will likely delay moves instead – particularly given the expectation that rates may come down a little towards the end of 2023 and into 2024.
‘As a result, we think transactions will take a bigger hit this year, while prices will remain sticky.’
Best mortgage rates and how to find them
Mortgage rates have risen substantially as the Bank of England’s base rate has climbed rapidly.
If you are looking to buy your first home, move or remortgage, or are a buy-to-let landlord, it’s important to get good independent mortgage advice from a broker who can help you find the best deal.
To help our readers find the best mortgage, This is Money has partnered with independent fee-free broker L&C.
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