The market hasn’t been particularly kind to housebuilders recently. Rampant build cost inflation followed by higher interest rates squeezed margins and stalled house price growth. Understandably, there’s been a degree of battening down the hatches, leaving the government increasingly worried about whether they'll get close to their own ambitious house building targets. However, as interest rates continue to fall, some new opportunities are likely to emerge in 2025.
1. First-Time Buyer Squeeze: Navigating the Affordability Challenge
With stamp duty hikes scheduled from April 2025, first-time buyers purchasing power will be hit. The share of first-time buyers subject to a bill will quadruple, from 8% of buyers in England to 26%. Those purchasing more expensive properties, particularly in Southern England, could face an additional £11,250 in stamp duty. In many cases, this increase will eat into what’s already a smaller than average deposit, reducing the price first-time buyers can pay for a home.
Every £1,000 increase in stamp duty essentially reduces the maximum amount a first-time buyer purchasing a £325k-£425k home with a 10% deposit would be able to borrow by £10,000. While lower mortgage rates in 2025 may offer some relief, they won't fully offset increased upfront costs.
As a result, we anticipate demand to shift towards smaller homes or more affordable areas, particularly within the capital. Developers are likely to respond by offering increased incentives, such as contributions towards stamp duty, to maintain demand in what’s been a growing segment of the market.
2. Help to Buy 2.0: A Potential Return to Boost Housing Delivery
With the government's ambitious target to build 1.5 million new homes during the next five years, there's a growing need for demand-side stimulus, which can kick in this parliament to complement long-term supply-side reforms. A revamped version of Help to Buy can’t be ruled out, particularly if the number of homes built continues to head south. However, it’s likely to be less generous than its predecessor.
The original Help to Buy scheme assisted 387,000 people in purchasing new-build homes and helped push housebuilding numbers back to pre-financial crisis levels. It also generated revenue (and so far, a profit) for the government, which could be reinvested in affordable housing. A new scheme might feature a reduced interest-free (or lower interest) equity loan, but could still unlock demand from first-time buyers who would otherwise be priced out.
3. Land of Opportunity: it isn’t all about the grey belt
All eyes are on the detail within the National Planning Policy Framework, expected out next year. And it's not all about the grey belt. Local authorities are expected to be asked to review their Green Belt boundaries and must allocate land to meet needs in full “unless there is clear evidence that alterations would fundamentally undermine the function of the Green Belt across the area of the plan as a whole”.
This would be a watering down of the existing guidance, which has the potential to unlock more housing in areas which have traditionally delivered the bulk of new suburban housebuilding, particularly on previously developed larger sites. However, whilst the changes are a step in the right direction and will provide housebuilders with some ground rules to plan for the future, delivery won’t be easy or quick.
4. Urban Revival: A Boost for Inner-City Flats
2025 is likely to see an improvement in demand for inner-city flats, driven by a combination of increased return to office working and lower mortgage rates, which are making owning increasingly more financially attractive than renting.
A first-time buyer purchasing a £500k home with a 25% deposit would currently pay £1,692 a month on mortgage repayments, potentially saving them £971 a month compared to renting that home. Even so, the deposit and stamp duty hurdle remains a challenge, which is why first-time buyers will increasingly seek smaller homes. Service charge inflation is also a concern for many would-be buyers, particularly those seeking a mortgage which will keep a tight lid on property values.
The legacy of COVID-19 remains, with ONS figures showing that 28% of workers are still adopting hybrid work patterns. This emphasises the ongoing importance of well-designed homes with dedicated workspace areas, a factor developers should consider in suburban projects too.
5. The Evolving International Buyer: From Investor to Occupier
The profile of international buyers in the UK property market is changing. There's been a shift from investment-focused Asian buyers to Western owner-occupiers. North American buyers now represent a record 14% of international purchasers in London, up from 1% a decade ago. Many of these movers, who are also benefitting from the strength of the US dollar, are seeking large family homes close to top schools.
We're also seeing a pickup in European buyers who took a backseat post-Brexit. They’re increasingly moving to the UK for job opportunities and are searching for urban homes, particularly in the capital, where they can easily access transport links home. While some choose to buy a home, others rent. People moving into the UK are increasingly looking at Build to Rent developments for convenience and access to a ready-made community from day one.
6. Prime Central London: Poised for a Comeback?
2025 is set to mark the beginning of a new housing cycle, with prices in London likely to rise faster than other regions. However, in contrast with the start of previous cycles (like the last one, which started after the 2008 financial crash), tax increases mean that areas outside PCL will probably be the strongest performers.
Whilst we still expect to see small prices rise in PCL next year, its full recovery will be delayed as buyers and sellers take stock of the revised rules for non-doms and the new capital gains and inheritance tax regime. That said, increased clarity on the tax landscape should stimulate activity towards the second half of the year.
From a new build perspective, limited planning approvals (and completions) in recent years should support property values, particularly for larger units in areas of Westminster given the restriction on planning approvals for properties over 200 square metres. This presents an opportunity for developers to focus on high-end properties in prime locations as values begin to creep upward.
