House price forecast: will 2023 be your year to buy a home in London? (2024)

Against a backdrop of rising interest rates, the cost-of-living crisis and growing fears of a recession, the cost of servicing a mortgage in London now dwarfs the cost of paying rent.

Although house prices have started to fall, it now costs £832 more a month to make mortgage repayments than to rent a property in the capital, which is the reverse of the traditional dynamic — according to exclusive data seen by Homes & Property.

The widening cost gap between owning and renting will put homeownership out of reach for many first-time buyers and quash the number of sales in 2023. This will cause house prices in the capital to tumble by as much as 12.5 per cent, experts predict.

The Bank of England raised the base rate (which dictates mortgage rates) by 0.5 per cent in December to 3.5 per cent, the highest it has been since the financial crisis. Economists believe it will jump again in the first quarter of the year to four per cent, pushing mortgage rates up further, after some fixed-rate deals hit highs of six per cent in October.

The increased cost of servicing a mortgage is exacerbated in London where house prices are higher than the rest of the country. As a result, the affordability gap between owning and renting has never been so vast in the capital, according to new research by Hamptons.

“Ever since interest rates started to rise in earnest, it has been cheaper on a monthly basis to rent rather than buy a home with a 10 per cent deposit,” says David Fell, analyst at Hamptons. In October, this difference hit £832 per month — an 11-year record. In October 2020 it was £49 more expensive to pay rent each month than to service a mortgage, the study shows.

“This [the gap] reduced slightly in November, but for the foreseeable future we expect it to be cheaper to rent than buy,” Fell adds.

The result will be a dramatic drop in house prices, reversing the growth seen during the pandemic era and the 2020 stamp duty holiday.

“The overriding factor influencing London’s house prices over the next 12 months will be the path of interest rates and what that means for buyer’s affordability at the point of purchase,” says Lucian Cook, head of residential research for Savills. “With the bank rate expected to hit four per cent in the first three months and stay there for the rest of the year we expect to see London house prices fall by 12.5 per cent, a little more than across the UK,” he adds.

Prospective first-time buyers have been hit the hardest by rising mortgage rates. In the immediate aftermath of the disastrous mini budget delivered by former chancellor Kwasi Kwarteng, high loan-to-value products aimed at first-time buyers, and deemed risky by lenders, were pulled off the market.

This was a repeat of the mortgage market’s reaction to Covid-19 in the spring of 2020 when first-time-buyer products all but disappeared.

For wannabe homebuyers, the eye-wateringly high deposits needed to buy in London have long been the biggest barrier. Now they have to stretch to find the monthly repayment amount too — if they even qualify for a mortgage offer.

Following interest rate hikes, a first-timer buyer in London needs to earn more today than in any year since 2012 to service the same mortgage, the Hamptons analysis shows. [The Hamptons affordability index started in 2012.]

The income a London first-time buyer needs to purchase with a 10 per cent deposit on a mortgage of 25 years (and based on house prices in 2022) has risen from £72,000 in November 2021 to £97,310 a year later. That’s a pay rise of £25,330 in just one year.

Alarmingly, according to the analysis, the rise in rates meant that in November first-timers would need a deposit of 29 per cent to bring the monthly mortgage repayments back in line with rents.

As a result of this imbalance, Fell suspects that transaction levels and house prices will reduce more drastically in outer London, the more affordable stamping ground of the first-time buyer as they “sit on their hands”.

Both Fell and Emma Cox, managing director of boutique lender Shawbrook, think that the void left by first-time buyers this year will be partially filled by investor landlords. When young purchasers do return, they will find more competition for new-build apartments. “While first-time buyers are holding out for more stable times, it is likely we’ll see opportunistic landlords capitalising on lower prices and market uncertainty to build their portfolios,” says Shaw.

It is now cheaper to rent than own across every borough in London, the Hamptons data shows. However, the gap between the cost of renting and owning is far less stark in outer boroughs, where house prices are lower. It is narrowest in Hillingdon in north-west London. This may, however, reflect the large number of build-to-rent schemes in areas such as Hayes. These tend to have a higher price point for tenants than rentals owned by individual landlords.

Hillingdon does still follow the same pattern as the rest of London: in November 2021 it cost £87 more to rent than own in the borough but a year later this reversed and it now costs £84 more to service a mortgage there than to pay rent.

The average rent in Hillingdon sits at £1,657, according to Hamptons, versus £1,742 for the average monthly mortgage repayment. The average house price in the borough is £443,582 (Rightmove).

Barking and Dagenham was the second cheapest borough for buyers in this context. Renting in the borough was £364 more expensive than owning 12 months ago, but now it is £161 more costly to own on a monthly basis.

Havering (£193 more expensive to own), Bexley (£276) and Croydon (£367) complete the top five boroughs where the cost gap is smallest. In inner London, owning is far more costly than renting.

In Kensington and Chelsea it costs £2,451 more to own than rent, compared with £1,850 at the end of 2021. Average rent is £4,240 whereas the average monthly mortgage repayment is £6,691.

Camden, Westminster, Islington and Haringey join Kensington and Chelsea at that end of the ranking.

“Traditionally it has nearly always been cheaper to buy than rent in outer London even with a relatively small deposit,” explains Fell. “But rising interest rates have more than offset record rental growth. The swing has been so large that in all but five boroughs, it is cheaper to rent than to even pay the interest element of the mortgage,” he says.

Although mortgage approvals have dropped and transaction levels are expected to follow suit in 2023, there is sales activity in some pockets in London in this muted winter market.

While regional buyers are prioritising proximity to open space, being close to family and having shops and amenities on the doorstep, Covid trends are moderating in London with buyers looking for easy and quick access into the office.

In a recent Savills survey of homebuyers, 43 per cent put being by a train or Tube station as their top priority. Back in June, they preferred to be near a park or common.

“We expect to see people return to the office on a more regular basis in 2023,” says Lucian Cook. “This, combined with the impact of rail strikes on people’s view of commuting is likely to shift the buyer focus back onto London.” He believes there will be high demand to buy close to public transport on the fringes of London.

Recent Census data published by the Office for National Statistics and giving a picture of homeowners across the country has revealed that high earners have drifted from central to east and southeast London over the past decade.

Fashionable areas such as Walthamstow attract families moving out of Hackney and swathes of new homes for first-time buyers are going up in Greenwich and Barking and Dagenham.

“This is a trend we expect to continue as some of these locations mature and the higher interest rate environment makes buyers focus on how far their mortgage will stretch in different parts of the capital,” Cook says.

Nutritionist Venetia Mitchell (venetiamitchell.co.uk), a teacher at the Soughdough School, had always lived in Battersea, but as many of her friends began to move out of the capital she headed east.

“I was attracted to the vibe of east London and wanted to buy in the more central part of Hackney such as Hoxton. But I was priced out,” she says.

She knew very little about Stoke Newington but found a two-bedroom garden flat there in a converted Victorian building. It cost £660,000, ahead of pandemic price rises.

Mitchell has renovated the property and extended it, adding a third bedroom. Her friend, interior designer Amelia Annfield (@miss_meelie_moo), rents this room from her which has helped with rising mortgage rates and with the decor.

Mitchell says: “I have made the most of the property which has been key to helping me manage rising costs.”

They cycle to Highbury & Islington to access central London quickly, take the Overground from Rectory Road or Dalston Kingsland, and use the regular bus service on the A10.

The friends have thrown themselves into work and social life in east London with Annfield designing the bedrooms of the Town Hall Hotel in Bethnal Green. They are spoilt for choice when dining out.

“Stokey is packed with amazing restaurants like Escocia, Rubedo and lot of delis, bakeries and independent shops,” says Annfield, who also recommends Ridley Road Market.

MORE ABOUT