Despite declining home costs, renting in the nation’s capital has surpassed buying for the first time in 13 years. In this case, it’s essential to consider if you should enter a volatile market or wait it out.
In London, the cost of mortgage payments has surpassed the cost of rent due to increasing interest rates, the cost-of-living problem, and mounting worries about a recession.
Buying a home in the capital is now more expensive than renting by £832 a month, according to exclusive data reviewed by Homes & Property, even though house prices have begun to decline.
Many first-time buyers will be priced out of the market in 2023 as the price difference between buying and renting widens. As a result, housing prices in the nation’s capital might fall by as much as 12.5%, according to some estimates.
In December, the Bank of England hiked its benchmark base rate (which determines mortgage rates) to 3.5 percent, the highest level since the 2008 financial crisis. Some fixed-rate arrangements reached highs of six percent in October, but economists predict a further increase to four percent in the first quarter of 2019.
London’s higher-than-average home prices make mortgage payments more expensive than in other parts of the nation. According to recent data compiled by Hamptons, this means that the affordability difference between buying and renting in the nation’s capital is more comprehensive than it has ever been.
According to David Fell, an analyst at Hamptons, “ever since interest rates began to climb in earnest,” renting has been more cost-effective than buying a property with a 10% down payment. An 11-year high of £832 per month was reached in October. The research indicates that in October 2020, renting was £49 more costly per month than mortgage payments.
Though the price difference narrowed marginally in November, Fell says, renting will likely remain more cost-effective than buying for the foreseeable future.
It will cause home values to fall drastically, undoing the gains made during the epidemic and the stamp duty holiday in 2020.
According to Lucian Cook, Savills’ director of residential research, “the overriding issue driving London’s property prices over the next 12 months will be the course of interest rates and what that implies for buyers’ affordability at the moment of purchase.” “With the bank rate likely to reach four percent in the first three months and remain at that for the rest of the year, we expect to see London home prices decline by 12.5 percent, a little more than throughout the UK,” he says.
For the first-time buyer, financial stability is more important than ever
Rising mortgage rates have had the most significant impact on would-be first-time buyers. High loan-to-value items marketed at first-time buyers but seen as dangerous by lenders were stopped from sale soon after former chancellor Kwasi Kwarteng’s disastrous mini-budget was released.
A similar reaction occurred in the spring of 2020 when first-time buyer products vanished from the mortgage market in response to Covid-19.
The staggeringly huge deposits required to purchase a house in London have long been the primary obstacle for would-be homeowners. Those who can get a mortgage must scrape together extra money to cover the monthly payment.
In light of recent interest rate increases, the Hamptons study reveals that a London first-time buyer must earn more than any year since 2012 to afford the same mortgage payment. Affordability tracking for the Hamptons began in 2012.
A first-time buyer in London now requires an annual salary of £97,310, up from £72,000 in November 2021, to be able to put down a 10% deposit and get a 25-year mortgage (based on 2022 property prices). To put that in perspective, it’s a raise of £25,330 over a year.
It was found that in November, due to the increase in rates, first-time buyers would require a deposit of 29% to make their mortgage payments compared to their monthly rent.
Due to this disparity, Fell believes that first-time buyers would “sit on their hands” and cause a dramatic drop in both transaction volume and property prices in outer London, where housing is more reasonably priced.
Investor landlords are expected to replace some of the holes left by first-time buyers this year, according to Fell and Emma Cox, managing directors of boutique lender Shawbrook. When millennials and Gen z buyers come back to the market, established homeowners will have a leg up on the battle for brand-new units. Shaw predicts that “opportunistic landlords” would take advantage of reduced prices and market instability to develop their portfolios while first-time purchasers wait for more stable times.
