The experience of the last four years is that we should expect the unexpected, and forecasting is not for the faint of heart. So it is with some trepidation that we say that the key theme underpinning this year’s forecast is stability and a return to the importance of market fundamentals, rather than lurching from one surprise to another as we have since 2020. 

We are confident that 2025 will be a positive year for house price growth, forecasting an average increase across the UK of 4%, as prices rise in both nominal and real terms. Buyer activity is also expected to increase, but there is still some potential for a little turbulence. The market remains sensitive to short term fluctuations in the cost of debt and changes to property taxation have the potential to cause some short term disruption. 

Getting through the turbulence

The performance of the housing market in recent months should give confidence that the outlook in the short term is improving. Despite the Bank of England only making one 25 basis points cut to the base rate so far, annual house price growth reached 3.2% in the year to September, the strongest figure since November 2022. Activity has also picked up, with mortgage approvals in August only 3% below the 2017-19 average. 

When we forecast in 2023, we were expecting that 2024 would still be marked by uncertainty, with the general election having the potential to act as a drag on the market. But after three prime ministers within two years, the UK now has a government with a strong majority. The political transition has been quicker than many expected at the start of the year, when the smart money was on a late autumn election. And while budget uncertainty acted as a drag on the top end of the market, there was little evidence of this in the mainstream.

Headwinds and Tailwinds

Heading into 2025, there are signals that the ride will be less bumpy. Forward indicators from the RICS survey have become increasingly positive. The net balance of opinion for new buyer enquiries has recovered from lows of -42 in the middle of 2023, to recording positive readings every month apart from three so far this year. This has been accompanied by an uptick in new instructions to sell, pointing to a more active market, and a return to an expectation for price growth for the first time since May 2022. 

Buyer activity is also likely to receive a short term boost from the upcoming changes to stamp duty in March 2025. The temporary rise in nil rate thresholds introduced under the last Government from £125,000 to £250,000, and from £300,000 to £450,000 for first time buyers, is due to come to an end. The potential to have to pay an extra £2,500 in SDLT will incentivise buyers to try to complete before March 2025, adding impetus to the early spring market, albeit dampening demand from these buyers a little thereafter.

That’s not to say there are no further headwinds to be dealt with. Several lenders have announced higher mortgage rates since the start of October, as a consequence of swap rates rising in response to the ongoing conflict in the Middle East, and recently in the aftermath of October’s budget. This has halted the downward progression seen in the mortgage markets since July, and does raise questions over the extent to which affordability will continue to improve in the short term.

There has already been a marked decrease in monthly mortgage costs for the average buyer with the prospect of future rates cuts quickly priced in to fixed rates. Instead, the primary effect of future rate cuts is likely to be in making it easier for borrowers to pass lenders’ affordability tests, which are more closely aligned to the prevailing bank base rate. Oxford Economics are still forecasting one further base rate cut of 25bps to come this year, with that downwards path continuing throughout 2025, which should underpin a gradual loosening of lenders’ purse strings.   

The other factor that could limit house price growth is the amount of properties available on the open market. Surveyors responding to the RICS survey have reported increasing stock over the last 6 months. And so the balance between buyers and sellers remains finely weighted, with the number of price reductions in September 2024 18% above the long term average.

The outlook: Clearer skies ahead

With the RICS survey showing positive sentiment for both new buyer enquiries and new stock coming to the market, and increased political certainty, price growth is likely to pick up pace in 2025. We are forecasting UK price growth of 4% next year, an increase from the 2.5-3% anticipated for 2024. We expect increased demand to primarily come from more people trading up the market; the second and third steppers who have put plans on hold in a higher interest rate environment

With inflation returning to the 2% target and the prospect that interest rates will continue to fall over the next two years, we are also able to look towards a return to consistent year on year price growth. You can read more about the longer term outlook in the following article, which explains the economic context and affordability landscape that underpins our five year forecast of 23.4%.