(Commonwealth_ The UK housing market has faced a turbulent few years, largely shaped by economic policies and global economic conditions. The aftermath of Liz Truss’s mini-budget in September 2022, which triggered a surge in borrowing costs, affects households. Despite these challenges, the market has shown unexpected resilience. Nationwide Building Society notes that while experts initially anticipated stagnant or declining house prices in 2024, average prices are projected to have risen by over 3%, following a 1.4% drop in 2023.
Looking ahead, house prices are expected to grow at a similar pace in 2025, with forecasts suggesting an acceleration to around 5.5% by 2026. Record-high rent increases, however, are predicted to moderate, potentially offering some relief to tenants. The for-sale market could gain momentum as interest rates gradually decline, although this process is expected to be slower than previously anticipated due to persistently high inflation. Furthermore, incomes rising faster than house prices may slightly ease affordability pressures, especially for first-time buyers.
The average UK home price nears £300,000, according to Halifax, presenting significant affordability challenges for many, particularly those attempting to save for a deposit amidst soaring rental costs. First-time buyers have struggled the most, grappling with record rental growth in recent years. Nevertheless, robust wage growth averaging 5.2% in October 2024, along with slightly lower mortgage rates, has helped sustain market activity. The number of monthly mortgage approvals for house purchases exceeded pre-pandemic levels toward the end of the year.
The Bank of England has cut interest rates twice in 2024, bringing them to 4.75%. However, the trajectory for further rate reductions has been tempered following Chancellor Rachel Reeves’s autumn budget, which introduced £40 billion in tax increases. These measures are expected to push inflation marginally higher than it would have been otherwise, constraining the Bank’s ability to lower borrowing costs significantly. Sticky services inflation, holding at 5%, further limits the central bank’s options. Financial markets anticipate two to three additional rate cuts in 2025, potentially reducing the bank rate to 4% by year-end.
Robert Gardner, Nationwide’s chief economist, predicts a reasonably steady housing market despite affordability barriers. He emphasizes that while lower interest rates and income growth outpacing house price growth will offer some relief, the effects will unfold gradually. “It’s going to take time for that process to have much of an effect,” Gardner cautions.
Mortgage rates remain elevated but have seen slight reductions recently. According to David Hollingworth, associate director at L&C Mortgages, average rates for two-year fixed mortgages stand at 5.46%, while five-year fixes are at 5.23%. Lenders are cautiously lowering fixed-rate deals as market conditions stabilize.
One factor poised to influence the housing market in early 2025 is a change in stamp duty rules effective April 1. The revisions include a lower stamp duty threshold and an additional band for second-home purchases, which is expected to spur a rush of activity in the first quarter as buyers aim to complete transactions before the changes take effect. This surge is likely to be followed by a lull in activity post-April.
For tenants, rental growth is expected to normalize in 2025. Private rent increases, which reached a record 9.1% across the UK in the 12 months to November 2024 (and 9.3% in England), are predicted to slow significantly, falling to around 4% or lower. While this represents a substantial decrease from current levels, affordability challenges remain for renters who have faced years of unprecedented growth.
The UK housing market is set to experience moderate recovery and stabilization in 2025, driven by easing interest rates, improved wage growth, and moderating rental increases. However, affordability issues for buyers and renters alike are likely to persist, necessitating a gradual adjustment period for the market to achieve more sustainable growth.
