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Simon needs to sell his home so he can move closer to his ageing parents. The 50-year-old lawyer found a house to buy a mile from them and, in April, accepted an offer on his home in Hampshire. However, a day before he was due to exchange contracts this month, the buyer reduced the amount they were willing to pay by more than £100,000.
“The buyer had agreed to pay £2mn and then, at the eleventh hour, said they were reducing this by 6 per cent — my estate agent says this is happening on a fairly regular basis in my area,” says Simon, who declined to give his surname. The house he is buying costs less than the one he is selling so, reluctantly, he is going ahead with the sale.
“My parents need me because they are not in the best of health and I’m lucky that I’ve ridden the property wave over recent years,” says Simon. “Yet right now really does feel like the wrong time to be moving.”
Soaring interest rates and falling house prices have sent a chill through the property market, causing buyers to make lower offers or pull out of purchases altogether — putting entire property chains in jeopardy. Bill Spreckley, regional director at Stacks Property Search, says that earlier this month one high-end estate agent in Hampshire had five deals collapse in the space of a single week.
Many buyers are pulling out because they simply cannot afford mortgage rates that are now hovering around their highest levels since the 2008 financial crisis. On Tuesday, the average two-year fixed mortgage rate stood at 6.83 per cent, while the average five-year fix was 6.34 per cent, according to the data company Moneyfacts.
And, despite a surprise fall in the inflation rate last month, rates are predicted to stay uncomfortably high for many months to come. “Lower inflation data for June probably signals the end of the upward march in mortgage rates,” says Andrew Wishart, senior economist at the consultancy Capital Economics. However, he believes mortgage rates are likely to plateau rather than fall as the Bank of England keeps interest rates high until next summer.
“Buyers and sellers are telling us that this feels very different to the turmoil resulting from last year’s ‘mini’ Budget,” says Marc Schneiderman, director of Arlington Residential estate agency in north London. Back then, the average two-year fixed mortgage rate hit 6.65 per cent, before falling back. “The sense then was that this was just a momentary wind of change and not likely to inflict great damage to the property market. The feeling now is that we are in the midst of a storm that has the potential to cause carnage,” he says.
-18%
Drop in buyer demand over the past two months, according to Zoopla
“The market seemed to adjust to rates of around 4 per cent,” says Lucian Cook, head of residential research at Savills estate agency. “What’s happening now is caused by a fundamental economic situation — persistently high inflation and the Bank’s attempts to bring this under control by raising rates. The effects will last substantially longer.”
Nationwide says average property prices fell 3.5 per cent in the year to June, while Zoopla’s latest house price index shows that rising mortgage rates over the past two months have reduced demand for homes by 18 per cent. Buyers are also shunning big, expensive properties: sales of three- and four-bedroom family homes are down 41 per cent compared with June 2022, Zoopla says.
Where sales are collapsing, around half are currently being caused by purchasers getting cold feet, according to the house buying company Quick Move Now. “Some buyers are not prepared to saddle themselves with a very expensive mortgage in a property market that is predicted by many to go down,” says Adrian Anderson, director of the mortgage broker Anderson Harris.
Another quarter of collapsed sales are down to buyers having difficulty getting a mortgage, or because the rate has become more expensive and they can no longer afford it. This is happening even when they have seven-figure budgets.
Martin Bikhit, managing director at the estate agency BHHS London, tells how, earlier this year, a married banker with two children found a family home in Knightsbridge, central London, and had his offer of £8.65mn accepted. “When he was ready to exchange, his mortgage offer had expired and because rates had gone up since, he could only afford to pay £7.75mn,” Bikhit says. “This offer was refused so the family are now looking for something else.”
Other failed sales are due to a bank down-valuing a property, believing it to be worth less than the buyer’s offer price, a property chain breaking down or a seller pulling out — in some cases, this is because buyers are “gazundering”, or reducing their offer after they have agreed the price.
“I’m seeing a lot of price chipping going on just before exchange, especially if there has been a long delay in a sale and the market has moved,” says Emma Fildes, founder of the buying agency Brick Weaver.
Fildes says that, in a deal agreed in London in November with a chain of five sets of buyers, those buying the most expensive house have just said they want to reduce their offer significantly. “The seller of the top house doesn’t want to accept the lower offer, leading to a stalemate and causing a roadblock for the other transactions,” she says.
Some sellers are accepting last-minute reductions — the buying agency Hutton Bubear successfully got £75,000 knocked off the £5mn price a client had agreed to pay after surveys revealed urgent works were needed to replace the electrics and septic tank.
However, many homeowners are still holding firm to prices that are now out of date. In May and June, just over half of homes sold across England and Wales were sold below their asking price, at an average discount of 4.4 per cent, according to Hamptons estate agency.
More people are now shunning mortgages altogether: Camilla Dell, managing partner of London buying agency Black Brick, says the number of her clients buying in cash has increased by at least 50 per cent compared with a year ago. However, since this is not an option for most, those who are determined to buy cannot borrow as much so must opt for cheaper properties.
Richard Donnell, research director at Zoopla, says a rise in mortgage rates from 4 per cent to 6 per cent reduces a purchaser’s buying power by up to 20 per cent if they want to keep monthly mortgage payments unchanged.
There are also the three Ds — death, divorce and debt — which keep the market moving, even in the hardest times, says Sarah Dwight, a conveyancing solicitor. “How the debt part will impact the market will be seen as homeowners struggle to pay their mortgages at increased interest rates,” she adds.
The plight of homeowners rolling off fixed-term deals and facing much higher mortgage repayments has been well documented in recent weeks. Worst hit will be those who took out two-year fixed mortgages in 2021 and 2022, at the height of the boom caused by the stamp duty holiday — they account for 20 per cent of the 400,000 borrowers reaching the end of their fixed deals in each quarter over the next year and will typically see their mortgage payments almost double, according to Capital Economics.
Emma, a sales director from north Devon, has always saved as much as she can and measured risks carefully. Yet, by the autumn, her mortgage payments will have soared by more than £2,000 a month, putting her in the most precarious financial position of her life.
She has three properties — her Devon home, a London flat she and her partner use when they are working there and a London buy-to-let property. The combined mortgages amount to more than £800,000 and all were on two-year fixes that have doubled. In the case of her pied-à-terre, they soared from 1.09 per cent to more than 6 per cent.
“The irony is, I thought I was doing the right thing having them on two-year fixes because my partner and I planned to sell them and buy somewhere bigger in Bristol,” says Emma, 43, who did not want to give her last name.
She is loath to raise the rent on her buy-to-let but has doubled the mortgage term on the London apartment to 32 years, meaning she will be paying it back until she is 75. She is also doing her best to make cutbacks — forgoing holidays, cancelling gym and Sky TV subscriptions and selling her clothes.
“I have always been so sensible with money, but I’m now feeling the biggest financial pressure I have ever felt,” Emma says. “The interest rate rises have been so thick and fast that I am now finding myself in a situation I never thought I’d be in.”
The consumer charity Citizens Advice says it is seeing increasingly large numbers of homeowners who are unable to afford their mortgage, while an April survey of more than 2,000 people with assets (including property) of £250,000-plus by the wealth manager Saltus found almost one in four were helping their adult children with their mortgage payments.
Tenants may be in an even more difficult situation. Around 68 per cent of rental properties have a buy-to-let mortgage and most of these are interest-only, meaning borrowers cannot reduce repayments to cover higher interest charges as most owner-occupiers can.
Calculations by Capital Economics suggest that 11 per cent of rental homes become lossmaking at a mortgage rate of 5 per cent, rising to 21 per cent at 6 per cent.
Many existing landlords will also fail affordability stress testing at higher interest rates, leading to warnings that they will have to inject capital, raise already record rents even higher — or sell up.
“Some of our landlords have already told us they are going to quit as it doesn’t make financial sense to retain buy-to-lets, especially after paying the tax on the rental income,” Anderson says.
The big question is: what will this mortgage storm do to house prices? Wishart warns that if mortgage rates stayed at around 6 per cent for several years, “a 25 per cent drop in house prices would be likely”. However, he expects easing inflation to allow interest rates to be cut from mid-2024, limiting nominal house price falls to around 12 per cent and bringing mortgage rates down to around 4 per cent by 2025. Nevertheless, when you take account of inflation, house prices have already dropped by more than 10 per cent (using Nationwide figures deflated by the consumer price index). “So we think they will drop by 23 per cent in total in real terms,” Wishart says.
“A serious house price correction is still unlikely,” says Martin Beck, chief economic adviser to forecasters the EY ITEM Club. He thinks the BoE will raise rates by 25 basis points when it meets next week, and perhaps once more in September.
“The fact that households’ financial position, in aggregate, is much healthier than the last time interest rates rose on a sustained basis will soften the impact of higher borrowing costs, as will measures to help mortgagors, such as facilitating moves to interest-only home loans. Meanwhile, unemployment remains low,” Beck says.
Only 30 per cent of households now own their home with a mortgage, the lowest share for at least 40 years, while the proportion of borrowers with fixed-rate mortgages has risen from around 70 per cent of mortgages at the start of the global financial crisis to 96 per cent, according to the real estate company Avison Young. Buyers are now also more rigorously stress-tested to ensure they can afford rising rates.
Donnell expects the most notable fallout of 6 per cent-plus interest rates will be that fewer people move house. He predicts a fall in transaction levels from the five-year average of 1.2mn to 950,000-1.15mn a year. However, he also points out that higher borrowing costs won’t be felt equally. “It will have more of an impact on higher-value markets in southern England and the Midlands, where a larger household income and deposit to buy a home with a mortgage is required,” he says.
Ultimately, high interest rates mean we are all going to have to get used to paying more to get less, says Neal Hudson, residential analyst and founder of research company BuiltPlace.
“New buyers need even bigger deposits and have higher mortgage repayments that they will be stuck with for longer leading to higher total interest payments,” he says. “And all this to buy a home that is probably smaller, further away and less appropriate to their long-term needs than the one they could’ve bought just last year.”
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