Publication

UK Cross Sector Outlook 2025: Residential

Lucian Cook explores the dependencies on which a sustained recovery of the housing market relies, the impact of government policies, and balance of supply and demand in the UK’s property market


It’s fair to say that there’s a lot going on from a residential property perspective as we enter 2025. We have a housing market in the early stages of recovery, significant rental reform rapidly working its way through parliament, and a cash-strapped government with bold ambitions to increase housing delivery.

All the ingredients for change are there. But it’s much less clear whether mixing together a range of sweet and sour political and economic forces will delight or disappoint the taste buds.


Sustaining a housing market recovery

Sustaining the housing recovery depends heavily on continued cuts in interest rates to bring more buyers (particularly the second and third steppers) back to the market.

With inflation bouncing around the Bank of England’s target of 2%, how quickly and how far the MPC reduces the bank base rate will determine the ability and appetite of lenders to loosen their purse strings. But fundamentally we expect to see the range of buyers and their purchasing power gradually increase over the next five years, allowing overall house price growth of between 20% to 25% over that period, with 4% pencilled in for 2024.

VAT on school fees, the reform of non-doms taxation and restricted inheritance tax reliefs all point to a recovery that is stronger in the mainstream market than its prime counterpart.


A change in market profile

Transactions are expected to recover, though their composition is likely to change across a market that takes on a slightly more nuanced flavour.

Both the owner-occupier and investor markets are expected to be less dominated by cash and equity-rich buyers.

Investors looking to expand their residential portfolio face an additional stamp duty surcharge following the Budget. This is likely to suppress the appetite of buy-to-let landlords, in a private rented sector that seems certain to increasingly become weighted to larger, wealthier landlords.


Rental reform reprised

This comes on top of a Renters’ Rights Bill which bears more than a passing resemblance to the Renters Reform that we expected to see become law in 2024. Though it will bring the Assured Shorthold Tenancy to an end more abruptly than previously proposed, provision for open market rent review has been retained as has the ultimate right to recover possession of the property upon sale.

In other respects, it is more tailored to the tastes of tenants than landlords than its predecessor, meaning it is likely to be less easily digested by private than institutional landlords. And so it is this latter group who looks set to benefit most from an even more entrenched imbalance between rental demand and supply, and the resulting growth in rental income streams.

The speed at which this legislation is passing through parliament is reflective of the new government’s focus on housing.

Housebuilding prioritised

A stated ambition to deliver 1.5 million new homes over the course of the new Labour government’s first term in office across England alone, comes with an acknowledgement that delivery will have be to ramped up to well over 300,000 homes per year at the back end of this period. From a planning perspective, the recipe book of the last political administration, which appeared to be missing a few important pages, has been ditched.

Local housing targets (in a revised form) have been restored. The presumption in favour of development has been strengthened and task forces have been assembled to unlock the grey belt in the green belt and find a new generation of new towns. Though the tension between national ambitions and local hunger for new homes is likely to mean planning remains a relatively protracted process in the short term, the balance has shifted. This bodes well from a supply-side perspective and suggests strategic land will be more readily brought through the planning system, in a way that remains highly problematic north of the border.

But this only deals with page one of a two- or three-page recipe.


Matching supply and demand

Here the distinction with underlying and proceedable demand is significant. There is no doubt that the underlying demand for affordable housing is vast, but housing associations’ financial capacity is not. It is hard to see how that changes, given constraints on government finances so starkly laid out during the budget in late October.

Already, developers are struggling to consistently obtain economically viable bids for Section 106 housing. Ambitions to increase the proportion of affordable housing in the mix, weighted towards social rented tenures, sit somewhat uncomfortably against that.

The absence of an open-market demand-side stimulus of the scale of Help to Buy, means finding alternative ingredients, embracing Build to Rent and more generally widening the political focus from first-time buyers.

Partnerships that bring together builders, public sector bodies and purpose-led finance are likely to become far more common, though whether there is sufficient scope to shift the dial as much as government may wish is another matter.

And, though there still needs to be a financial incentive for landowners to bring land forward for the delivery of new homes at scale, the returns from doing so are likely to come under pressure.