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London homeowners received a stark warning about the potential for a significant property crash, with a possible 20% decrease in house and flat values if mortgage rates remain high. Experts in the property market are growing increasingly concerned about an impending "tipping point" that could lead to a freefall if the Bank of England continues to raise interest rates. Despite facing 13 rate increases from the Bank's Monetary Policy Committee, which have raised borrowing costs from 0.1% in December 2021 to five per cent at present, the market has shown surprising resilience. According to the largest lender in Britain, Halifax, prices have only declined modestly by 2.6% in the year up to June.
However, the crucial decisions on interest rates in August and September are seen as pivotal in determining whether the market will experience a gentle "soft landing" or a severe plummet. The situation is compounded by nearly one million fixed-rate mortgages, including approximately 100,000 for London properties, that need refinancing before the end of the year. This exposes homeowners to harsh repayment increases amidst a cost-of-living crisis.
The Bank recently issued a warning that tens of thousands of Londoners could face annual mortgage rises exceeding £12,000 by 2026, with many others facing increases of at least £6,000. This highlights the capital's vulnerability to interest rate hikes, which could trigger property price falls. Experts believe that further rate hikes could lead to a price decline of up to 10%. If rates rise even more, the consequences for London homeowners could be catastrophic, potentially resulting in a 20% decline in prices from their peak.
Governor Andrew Bailey is facing a dilemma, needing to hike interest rates to combat high inflation while risking pushing Britain into a recession. Furthermore, the growing number of landlords putting their properties on the market may further depress prices.
The political risks are also increasing for Prime Minister Rishi Sunak as mortgage costs rise. He may face the challenge of going into the next election, expected in the autumn of 2024, with millions of disgruntled homeowners experiencing substantial mortgage bill increases, while many others are anticipating such hikes in the future. Additionally, tenants are suffering as landlords raise rents.
City markets are now speculating that interest rates could remain at six per cent or higher throughout the next year, with some predictions even suggesting they could reach seven per cent.
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