After years of praying for a house price crash, it’s time for a U-turn
When you’re a first-time buyer, you selfishly hope for one thing to happen to the housing market: prices to drop dramatically.
The gulf between house prices and wages, particularly in London and the south east, makes getting on the property ladder feel impossible.
You’re setting out to save at least £30,000 to have a 10pc deposit, and would need an income of at least £60,000 to be in with a shot of buying a £300,000 house (which doesn’t go far in much of the country, and won’t get you anything in the capital).
A drastic decline in house prices seems like the ideal solution – as long as you ignore the fact that it would primarily hurt those poor folk a few steps ahead of you, who have only just managed to buy and would probably wind up in negative equity.
I gave up on London, but with some savings of our own and hefty help from family, we managed to buy on the Isle of Wight.
And once you’re on the ladder, your hopes for the housing market become a little more complex. Any house price increase will boost your own value, but the price tag for the semi-detached down the road with an extra bedroom and a larger garden also goes up.
If you’re upsizing like me, I’ve always assumed that stagnating house prices or even a slight dip would work in your favour. Say you have a home worth £200,000 and you’re looking to buy something worth £300,000. If prices go up 10pc, you might gain £20,000, but your next property increases by £30,000. If prices go down, the reverse is true.
At the moment, though, I’m not hoping for this at all. In fact, an increase in prices would be good for my future house move and ultimately, my bank balance. This is because if prices go up, it will be because debt has become cheaper.
It all comes down to interest rates. Mortgage rates skyrocketed in 2022 and the first half of last year as the Bank of England increased the Bank Rate from 0.1pc to 5.25pc to deal with rapidly rising inflation.
When I remortgaged in April, our rate went from 1.4pc to more than 5pc and the monthly payments more than doubled. We had plenty of warning, but it was still painful.
Rates are now falling – the average two-year rate across the big six lenders is 4.6pc, down from 4.7pc last month, according to comparison site Uswitch – and lower-than-expected inflation figures will only put more pressure on the Bank of England to cut rates at its next meeting.
The estate agent Savills reckons house prices could go up 2.5pc over the course of the next year if rates continue to fall. Contrary to my previous assumptions, this would suit me just fine.
Here are my sums. At the moment, my house has been valued at £200,000. I have a £150,000 mortgage, so that puts my equity at £50,000. The houses I’m lusting over on Rightmove are around the £330,000 mark, so I would need a mortgage of £280,000 to make the dream a reality.
With a rate of 4.57pc, that puts my monthly payments at around £1,570 and a total of £37,600 over two years.
Now let’s say Savills is right, and prices go up 2.5pc as rates come down. My house is now worth £205,000, my equity is £55,000 and the mortgage I need for my next home (which has also gone up) is now £283,250.
Interest rates have come down slightly, so I’m now on a rate of 3.9pc. My monthly payment is £1,480 – nearly £90 a month less, and a saving of more than £2,000 over a two-year mortgage deal.
And what if prices were to come down, and interest rates went skyward? If the rate increased to 5pc and house prices fell 2.5pc, I would need a mortgage of £276,750, and my monthly payments would be about £1,620. This scenario would cost me £50 extra a month, or £1,225 over the two years.
So, dear house price gods, I apologise for the confusion but I’m changing tack. After years of praying for a house price crash, I’ve done the maths and it’s time for a U-turn: prices up, please.