Mainstream house price growth to pick up in 2025
Savills are confident that 2025 will be a positive year for house price growth, forecasting an average increase across the UK of 4%, as prices rise in both nominal and real terms. The direction of mortgage rates has been key to buyer decisions over the past two years, and decreased monthly mortgage costs are now feeding through into improved confidence amongst prospective buyers, prompting the moderate house price growth we have seen over the past few months.
Lower levels of homeworking and the need to return to commuter hotspots near major employment hubs will continue to drive the stronger-than-expected performance in London over the past 12 months. We expect to see some residual impact of the unwinding of the ‘race for space’ in 2025, bringing growth in the South West and East of England below that of the capital.
Prime housing market activity to lag behind
In a normal housing market recovery, you would expect the top-end of the market to recover first, responding quickest to a change in sentiment. However, the additional stamp duty surcharge for second homes, changes in ‘non-doms’ taxation and VAT on school fees are likely to offset some of the impacts of future cuts in interest rates this time around, meaning that prime market activity will lag behind the mainstream.
The markets of prime central London are most directly affected and will feel the brunt of the abolition of the ‘non-dom’ tax status, leading to modest price falls next year. But, the outlook is somewhat brighter in the prime markets outside London. Prime regional markets, in particular, are likely to benefit from some displaced demand as families look to strike a balance between house prices, commutability, and access to schooling.
Lack of supply will continue to push up rents
High demand and low supply have been the influence behind the significant rental growth seen over the past few years. At a national level, this pattern looks set to continue with rents expected to rise above incomes again, especially as it is difficult to see where an increase in rental supply will come from in the next couple of years. As a result, we have forecast that rents will rise a further +4.0% in 2025 – outpacing income growth.
However, strong rental growth has stretched the finances of those living in the rental sector, limiting the capacity for further increases in some markets. In particular, slower rental growth through 2024 has led to a slight easing of affordability pressures in London. We expect that this trend will continue in the near term with rental growth of 2.5% in London in 2025, against income growth of +2.9%.
We expect to see more affordable markets in the North, where mortgaged buyers are under less strain, to see the strongest acceleration in growth beyond 2025.
Recovery in buyer activity will not be uniform
Transaction volumes will gain momentum next year, but recovery will not be uniform, with noticeable differences across buyer groups. First-time buyer activity is expected to be front-loaded in 2025 as these buyers rush to beat the end of stamp duty concessions in March. While mortgaged home movers, who have held off moving due to a harsher mortgage rate environment, will also return to the market. In the first instance, this is likely to be driven by needs-based buyers, will more movers gradually returning as rates drop further.
We expect cash buyers’ share of the market to drop back from comprising over 40% of all transactions, to nearer the long-term average of 35%. Opportunistic buyers that have benefited from the weaker market of the last two years will be squeezed out by increasing numbers of mortgaged owner occupiers.
Source: Savills
