An ever changing picture
When we released our house price forecasts in November last year, we predicted that if the last few years had been a rollercoaster ride in the housing market, 2025 would be more of a gentle trip on the teacups. We thought that falling interest rates and improving market sentiment would allow moderate house price growth of 23.4% over the five years to 2029, although we expected transactions to remain below the long term average.
In some senses, that outlook remains largely intact. Interest rates have fallen much as expected, with two base rate cuts in 2025 so far, and a further two expected by the end of the year. Mortgage rates are hovering around the 4% mark for many products, giving buyers a bit more financial capacity than they had a year or two ago.
But a lot has changed in six months. The geopolitical helter-skelter has taken us through Trump’s tariffs, trade wars and heightened tensions in several arenas to leave the world feeling like a more divided and less certain place – one in which predicting the precise path of interest rates is like trying to play the coconut shy blindfolded.
And whilst the March changes to Stamp Duty relief gave the market impetus at the start of the year, the last three months have been marked by a lack of buyer activity, despite the improving outlook for affordability.
These factors have added up to produce a delicately balanced market. Annual house price growth has slowed to 2.1% in the year to June, according to Nationwide, down from a rate of 4.7% in December 2024. Monthly readings of the index so far this year have been volatile, with positive growth in January, February and May, but falls in the other three months.
In light of this cautious start to the year, and the potential for more buyer jitters in the run up to the Autumn Budget given the state of public finances, we have revised our UK forecast for 2025 down to 1.0%.
Against this backdrop, we expect concerns over the prospect of future tax increases to weigh most heavily on the top end of the market. However, there are reasons to have confidence in the wider market picking up the pace over the remainder of the forecast period. Oxford Economics forecast cuts to the base rate totalling 175bps by the end of 2027, which will result in steadily improving mortgage affordability.
More borrowing capacity has also been created through the more relaxed approach to mortgage regulation, including the application of the affordability stress tests, and the Bank of England also allowing individual lenders to have more than 15% of their loan book above an LTI ratio of 4.5. Both of these measures are likely to boost transaction volumes, as the hurdle of saving for a deposit faced by many first time buyers will be reduced.
Finally, although overall expectations for GDP growth are slightly weaker than when we last forecast in November 2024, a strengthening economy in 2027-29, combined with forecast wage growth of over 22% over the five year period should boost buyer confidence and the willingness to take advantage of improved mortgage conditions. As a result, we expect that by 2027, transaction numbers will approach the post-GFC norm of 1.2 million per year.
The key drivers
1. Stamp Duty disruption
Understanding the relative strength of the housing market in 2025 has been complicated by the changes in buyer behaviour prompted by Stamp Duty changes. Underestimate a Brit’s love for a tax saving at your peril. Transactions boomed in early 2025 as buyers rushed to beat the deadline - in fact, March saw the second highest number of sales in a month since 2006.
Following this rush, completed transactions were then unsurprisingly down in April on normal levels. Volumes picked up in May, but were still 16% lower than the 2017-19 average for the month. Previous analysis of ours shows it typically takes 2-3 months for the market to fully adjust to SDLT changes, so it won’t be clear until later in the summer whether we are following this typical pattern, or if the fall in transactions is indicative of broader market weakness.
2. Mixed signals from short term indicators
As for what happens next, there are mixed signals from our favoured short-term indicators. The RICS survey suggests that demand has been weak for much of the year and the market is relatively slow. New buyer enquiries fell in March to its lowest since September 2023, at a net balance of -32. This was to be expected, as buyers brought enquiries forward into late 2024 to beat the changes to stamp duty (although the subsequent dip appears to be more significant than any pre-deadline rise). This measure turned positive again in June, at +3, but it will take time for the impact of weaker demand to feed through into prices and transactions.
Supply has recorded a positive net balance consistently in 2025, reaching +3 in June, but sales agreed have been low, averaging -21 between February and May (although they have recovered to -3 in June). Combined, the gap between these two measures would normally suggest falling prices, and the Nationwide index has confirmed this, with values down -0.5% in Q2, reflecting high levels of unsold stock on the market.
In contrast, and offering a more optimistic outlook, both Zoopla and Rightmove suggest that sales agreed in May were the highest in several years, implying the high level of supply available is being set against an underlying core of committed needs-based buyers. While there may not be a deep seam of underbidders, this is confirmed by TwentyCI data from listings portals, showing net sales agreed up 6% against the previous year, albeit alongside an elevated number of price adjustments.
Taking the evidence in the round, we think that over the remainder of the year demand is likely to be a little stronger than the RICS survey indicates, with the quieter period post-stamp duty change likely to pick up going to into the autumn on the back of an August base rate cut and a competitive mortgage market. Activity should therefore increase from its April and May level. High supply is likely to mean price growth is limited, but we still expect it to be in positive territory for 2025 as a whole despite a slow start.
3. Beyond 2025
Beyond the next year, house price growth will still be determined by affordability. Interest rates have moved largely as expected so far, which has already shifted the affordability equation more in favour of buyers. And with Oxford Economics predicting a base rate of 2.5% in 2027, mortgage rates likely have further to fall, even if some of these future cuts are already priced in.
As importantly, following FCA clarification that lenders have more discretion in the way they apply affordability tests, we have seen the vast majority of lenders loosen their lending criteria. That opens up capacity for more house price growth than would otherwise be the case, in what should ultimately be a higher transaction market, where more borrowers are able to borrow a higher multiple of their income at higher loan to value ratios. We expect this to offset the weaker economic outlook over the forecast period as a whole, albeit the weakened prospects for economic growth will temper homebuyers' appetite to stretch themselves much further.
Recent experience tells us that the path of interest rates is often winding and uneven, and we should therefore still treat the outlook with caution. MPC member Sir Dave Ramsden aptly pointed out that use of the word ‘uncertainty’ in the Bank’s Monetary Policy Report has increased from 20 times in August 2024 and 59 in February 2025 to a whopping 112 times in their May report.
Downgrades to global economic growth forecasts, on the back of US tariff policy and growing geopolitical tensions, have placed downwards pressure on interest rates. Higher than expected inflation in the UK is pushing in the opposite direction and making policymakers cautious when it comes to further base rate cuts.
While we have forecast based on the central scenario described above, there are clearly ongoing risks in both directions which have the potential to disrupt the housing market.