What will happen to House Prices in 2025?
The housing market in 2024 returned to growth, with Nationwide, in its latest house price index, reporting that house prices rose by 4.7% in 2024. The housing market has shown remarkable resilience, given the affordability challenges brought on by the high interest rates and record house price growth during the pandemic. The average house price, according to Nationwide, was at £269,426 at the end of last year, just a little shy of the record-high price set in the summer of 2022.
So, what will happen to House Prices in 2025?
To assess that, we are going to have to look at some of the key events and policy changes that can impact house prices in 2025:
Impact of Stamp Duty Changes:
The stamp duty threshold is set to change from April this year. The value threshold at which stamp duty starts to be charged will half from the current £250,000 to £125,000 from April. The first-time buyer threshold will decrease from £425,000 to £300,000, costing the average first-time buyer an extra £6,250. This change, combined with the increase in the stamp duty surcharge for second-home buyers from 3% to 5%, will exacerbate the affordability challenges buyers face today.
The stamp duty changes from April will likely cause a rush in the first three months of the year as buyers rush to complete transactions before the new stamp duty threshold comes into force. This is evident in Zoopla’s latest UK house price index, where the buyer demand is 13% higher than last year, as the graph below illustrates.
The changes to the stamp duty threshold are likely to make the cost of buying, moving and investing in a home a lot more expensive, causing further blow to the affordability challenges faced by buyers in today’s market and has the potential to slow down house price growth in the second half of 2025.
But could affordability increase in 2025?
Affordability challenges faced by first-time buyers and homeowners could improve significantly in 2025. Interest rates will likely drop in 2025, and wages have outstripped house price growth in the last three years. According to Zoopla, between the second quarter of 2022 and the second quarter of 2024, disposable incomes rose by 15% while house prices grew by just 1.5% during the same period. Halifax reported that in 2024, the average house price was 6.55 times the average income, down from 6.62 in 2023 and well below the peak of 7.24 in 2022. Halifax also reported that mortgage payments as a percentage of take-home pay decreased from 33% in 2023 to 29% of average take-home pay in 2024—the lowest in over 2 years. If wages continue to grow and interest rates fall in 2025, that will likely boost the housing market in 2025.
Interest rates are likely to drop in 2025:
The Bank of England is expected to slash interest rates multiple times in 2025 as the UK economy struggles with rising unemployment and stagnant growth. Wall Street banks, including Morgan Stanley and Goldman Sachs, predict up to six rate cuts, bringing the base rate as low as 3.25% by next year. If interest rates drop as the big banks expect them to in 2025, it could boost house price growth this year.
Mortgage Rules could be eased to allow people to borrow more:
The UK government is considering easing stringent mortgage regulations established after the 2008 financial crisis to allow people to borrow more. Lenders can only allocate 15% of their total mortgage lending to individuals borrowing more than 4.5 times their annual income. Proposed changes aim to relax this cap, potentially allowing more borrowers to access higher loan amounts. Additionally, the government is exploring adjustments to affordability assessments, such as incorporating rental payment histories alongside income evaluations, to facilitate easier mortgage access for first-time buyers. These potential regulatory modifications could significantly influence housing demand and house prices in 2025.
What are the key forecasts for house price growth in 2025?
Zoopla: Forecasts a 2.5% increase in average UK house prices for 2025. They attribute this growth to a healthy stock of homes for sale, falling mortgage rates, and rising incomes, which are expected to improve housing affordability over the year.
Rightmove: Rightmove predicts a 4% rise in average asking prices throughout 2025. They note that while buyer demand has increased, affordability remains a constraint due to high mortgage rates limiting borrowing power. The market is expected to favour buyers, with a healthy stock of homes keeping price rises in check.
Savills: Forecasts that the Northwest, Northeast, Scotland, Yorkshire, and the Humber will see the most significant growth, with house prices expected to rise by 5.0% in 2025. In contrast, the East of England and the Southwest are forecast to experience a more modest increase of 2.5% during the same period.
The Property Post Forecast for 2025:
House prices are likely to continue their positive growth trend in 2025 and will likely see a North-South divide when it comes to house price growth, as Savills forecasts. However, the South of England could see higher growth, too, especially as affordability pressures will likely ease in 2025. We expect a 4% growth in house prices for 2025, predominantly due to easing affordability pressures and falling interest rates. Changes to mortgage rules could further boost the house price growth this year. However, it is still early, and developments in the coming weeks and months could alter the trajectory of the housing market. Our forecasts are based on the data available to us today.
