Lower mortgage rates have been the principal catalyst for change, falling much more rapidly than we had expected. House prices are moving upwards, reversing the declines of 2023. Yet, while the future direction of interest rates seems to have been mapped out, the pace of this journey and its ultimate destination remain uncertain.
Looking ahead to 2025, we are not altering our forecast of 3.0% price growth for Great Britain, although our reasoning has evolved.
We now argue that improved affordability, driven by lower mortgage rates and robust pay rises, looks likely to fuel price increases and transactions. We expect home sales across Great Britain to near 1.2 million in 2025.
Based on current market expectations, the base rate should move further downwards to around 3.75% by the end of 2025, reaching a new norm of about 3.5% in 2026. We expect mortgage rates to fall to their lowest point midway through next year. They are unlikely to be significantly cheaper than at present since the expected decline in the base rate is already priced into the cost of deals.
But the Budget measures pose a threat to this outlook, potentially putting brakes on the housing market recovery. Interest rates may stay higher for longer and increases in employer national insurance contributions may hold back wage growth. The rise in the stamp duty (SDLT) surcharge on second and rental homes from 3% to 5% will also have repercussions.
Also, geopolitical tensions are simmering in the background. Another energy price shock does not form part of our forecasts. Nevertheless, it remains a possibility that could upend any predictions, compelling the Bank of England and other central banks to keep rates higher for longer.
Meanwhile, the broader economy remains fragile. Economic growth is weak and a rise in unemployment is expected. Tax increases will hold back house prices - and slow transactions in the prime property markets.
"The combined effect of persistently higher interest rates and sluggish economic growth is likely to dampen long-term house price performance."
Despite this, we forecast that the average house price in Great Britain will climb to about £300,000 by the end of 2025– this is about £10,000 above its current level.
2025 could mark the beginning of a new house price cycle, with London poised to outperform other regions. We do not expect a precise repeat of previous cycles, however.
This recovery is likely to be led by areas outside Prime Central London (PCL) which will be overshadowed by higher taxation and global uncertainty. In fact, the likely impact of larger tax bills has led us to reduce our estimates for price growth in the whole of London between 2024 and 2026 by 3.0%.
In the rental market, lower mortgage rates have held back rental growth more than was expected. The average rent is likely to rise by 4.5% this year, against 10.2% in 2023. In the time ahead, the tension between limited supply and affordability constraints seems set to result in rental growth of about 4.5% in 2025 and 4.0% in both 2026 and 2027. This will outpace the increase in house prices, particularly as the rising SDLT surcharge on second home purchases puts further pressure on the number of homes available to rent.
Even further ahead, the combined effect of persistently higher interest rates and sluggish economic growth is likely to dampen long-term house price performance. The fiscal boost announced in the Budget could result in rates staying higher for longer. We have downgraded our forecasts to price growth of 3.5% in 2026 and 2.5% in 2027. This compares with an average of 3.9% between 2015 and 2019. Once the yield curve on government bonds (‘gilts’) returns to its normal trajectory sometime in 2026-2027, mortgages may become slightly more expensive.
In the next few years, the path of interest rates and affordability will largely determine house prices and rents. But political policy will also be key.