During the course of 2024, there has been a turning point in the housing market. House price declines – which averaged 2.6% across Great Britain in the final quarter of 2023 – began to reverse as mortgage rates dropped. By April, the Office for National Statistics (ONS) index, on which we base our forecasts, showed annual price growth turning positive.

Subsequently, these price increases have gathered pace, with a year-on-year rise of 2.3% reported in August. In this month the average price hit a new high, surpassing its peak before the Liz Truss mini-Budget in 2022. The rebound in the South continues to lag the North of England, however. Also, these August figures show sales that were mostly agreed around Spring time, which means that they do not reflect post-election sentiment.

However, our more up-to-date metrics indicate a pick-up in tempo. Demand has improved, faster than the number of homes coming onto the market and price reductions are becoming less common. But the mood in the prime markets has been a little more cautious, thanks to the speculation about capital gains tax, inheritance tax and SDLT increases.

"Transactions across Great Britain are likely to total just under 1.1m, in line with our forecast, against 996,000 in 2023, which was the lowest in a decade."



By the end of this year we think that the average value of a home in Great Britain will be 3.5% higher than at the final quarter of 2023. Last year, we forecast that there would be no change, but interest rates have come down faster than we thought, meaning that the cost of mortgages has fallen more. In September 2023, the average rate on a five-year fixed-rate deal at 75% LTV was 5.24%. It is now 4.1%.

Improved affordability has also boosted sales. Transactions across Great Britain are likely to total just under 1.1m, in line with our forecast, against 996,000 in 2023, which was the lowest in a decade. First-time buyers have fuelled this rebound, accounting for a record 31% of all sales.

Nevertheless, transaction numbers still remain below the 2015-19 annual average of 1.2m, as the higher interest rate era and the resurgence in house prices continue to bar would-be movers from the market.


2025

The downward trend in rates next year should boost prices and sales - which is the main reason why our forecast of 3.0% price growth across Great Britain remains unchanged. We are also maintaining our forecast of a bounce in transactions which should near 1.2m, a rise of 9% over 2024. The lower cost of borrowing and improved affordability will support prices and sales. But property values will be constrained by higher taxation and the weak economic backdrop.

In the main, the base rate cuts likely to be ordered by the Bank of England in 2025 have already been priced into mortgages. But, while advertised mortgage rates may not be cheaper, fierce competition among lenders should produce more attractive deals for borrowers seeking higher LTV loans and niche lending. Such a development should aid FTBs, and households who are upsizing, who tend to require relatively larger loans.

Mortgage rates seem set to drop to their lowest level towards the end of 2025. This should spark an increase in activity in the South where households tend to take on more debt in cash terms, and where prices are yet to revive.


We argue that 2025 is likely to mark the beginning of a new housing cycle, with prices in London pulling further ahead of other regions. As a consequence of this trend, we forecast an average property value gain of 4.0% in the capital, meaning prices in the capital surpass their previous pre-mini Budget peak. But, in contrast with previous cycles (like the last one which started in 2008) tax increases mean that areas outside PCL will be the strongest performers. PCL’s 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.

Stamp duty is another tax that will become a bigger burden from April 2025. The starting point will drop from £250,000 to £125,000, adding as much as £2,500 to the cost of a typical move. First-time buyers, particularly in the South of England where prices are higher, will also pay more. Currently they start to pay this tax at £425,000. This nil-rate band will go down to £300,000, which could cost some FTBs an extra £11,250. These buyers will instead purchase more affordable homes, or it could mean having to save up for longer, potentially weighing on homeownership rates.

Collective tax changes mean that we've revised down price growth prospects across the capital in 2025 and beyond.

"Mortgage rates seem set to drop to their lowest level towards the end of 2025. This should spark an increase in activity in the South."

During the first months of 2025, there could be a pick-up in transactions in advance of these changes. But, as a result of transactions being brought forward, the tempo may subsequently slow. At the same time, since the scale of stamp duty saving will be small for most movers, there is unlikely to be a stampede to beat the deadline.

As in past years, affordability is likely to be the key determinant of the market’s direction in 2025. Pay settlements seem set to outpace inflation for the second year running, and alongside cheaper borrowing, this should encourage some of those who had been deferring moving to embark on the search for a new home.

2026

Our current expectation is that the base rate will settle at around 3.5% in 2026. The typical mortgage rate will follow suit, dropping to about 4.0%, against just below 5% today. This should create room for a bit more price growth in 2026.

But, in the last months of the year, mortgage rates may start to edge upwards, as the financial markets anticipate the next interest rate cycle. These trends, combined with a higher tax and weak economic growth environment, are the reason why we are downgrading our 2026 house price growth forecast from 5.0% to 3.5%. Higher interest rates for longer will dampen buyers’ enthusiasm and lock some would-be buyers out of the market.

"We are downgrading our 2026 house price growth forecast from 5.0% to 3.5%."

We expect growth to be driven by the South, with prices reaching new peaks in most locations in these regions, enabling homeowners whose house prices had taken a hit to contemplate a move. There may also be a small revival in PCL, with buyers having - just about - learnt to live with the tax increases of the 2024 Budget

We are forecasting 1.2m transactions across Great Britain in 2026. The figure would normally be larger at this stage of the cycle, but interest rates will act as a drag. Furthermore, fewer new homes are being built thanks to planning and other restrictions. This lack of supply should support prices. Meanwhile, there should be more flats for sale as a result of leaseholder reforms and the remediation of blocks with dangerous cladding.

2027

In the longer-term, we expect house price growth to mirror income growth of 2.5% a year, and this is our forecast for 2027. Between 2015 and 2019, when the base rate was below 1%, annual house price growth across Great Britain averaged 3.9% a year. The new era of interest rates, in which the base rate will likely be above 3%, will moderate house price growth. Rising employment will be a source of risk, but more to transactions than property values.

" Price appreciation in London seems set to ripple out to other regions rather more rapidly than in the past"

Prices in London are set to outpace other regions, but not to the degree seen earlier this century. Between the end of the global financial crisis of 2008 and 2012, prices soared by 20% in the capital. Between the end of 2024 and 2027, we are forecasting an increase of 14.5%. This compares to 12.5% growth across Great Britain.

But price appreciation in London seems set to ripple out to other regions rather more rapidly than in the past. For this reason, we are forecasting a larger uplift in other Southern markets in 2027, especially since flexible working means that their fortunes are now more closely tied to those of London.

The higher cost of borrowing will limit transaction numbers since some would-be buyers are locked-out. At the beginning of this decade, we expected that annual sales would achieve a new normal of 1.4m, given the increase in households over the past 10 years. But we now expect the new norm will be closer to 1.3m.

Despite the strengthening economy, homeownership will remain a challenge for low-income households, with more exacting stress-testing checks and higher deposit requirements than in previous cycles.

Labour have come into government, pledging to deliver 1.5m new homes over the next five years. While some of this new housing may start to ramp up in 2027, this is unlikely to have much impact on transactions and prices.