As a Londoner, I'm sad to say high property prices seem sustainable. With a decent deposit, you can borrow long term at around 2%, which makes living in a £0.5

As a Londoner, I'm sad to say high property prices seem sustainable. With a decent deposit, you can borrow long term at around 2%, which makes living in a £0.5m flat cost £10k a year, less than £1k a month. That's very affordable for a couple. The problem is the vicious cycle of low interest rates. I would argue that most important variable affecting house prices is long term expectations of interest rates. Very (very!) roughly, if long term mortgage interest rates half, we would expect property prices to double. In the past decade, property prices have been driven up by very low interest rates, which have meant that's its affordable to service very large mortgages. Interest rates have stayed lower, for longer than anticipated, which has driven higher and higher prices The problem is that these low interest rates have increased the potency of monetary policy: with higher house prices, an increase of 1 percentage point on mortgage rate hits you really hard. Previously a movement from say 5% to 6% interest on your mortgage mattered less. This means that rises in interest rates will be smaller and take longer than historically, 'locking in' high property prices. I don't expect to see interest rates return to 'normal' levels any time soon. I'm not arguing that the market is not overinflated, but I doubt there will be anything like an apocalypse. Maybe we see prices coming down 10%-20% at most.