What is the outlook for UK house prices in 2025?

Homeowners and investors are hoping to see house prices rise in 2025, and they may get that if the UK economy doesn't spoil the show.

UK house prices rose 3.3% for the year despite the December price drop, hitting the highest rate since 2008.

You would think higher interest rates would cool demand. That's because higher monthly mortgage payments appear less attractive to potential buyers.

However, there is tentative evidence of a wider cyclical recovery in the UK housing market. Interest rates are starting to fall, with two rate cuts in 2024 and at least one more this year. Mortgage interest rates are also falling. Home building talk is back in politics.

The average five-year fixed rate mortgage at the start of January 2024 was 5.55%, according to the Moneyfacts UK Mortgage Trends report. At the start of 2025, it has now decreased by 0.30% to 5.25%. The average two-year fixed interest rate also decreased by 0.45% from 5.93% to 5.48% during the same period.

Michael Field, European markets strategist at Morningstars, said these factors should give homeowners confidence in 2025.

Weak house prices in December may have caused anxiety among investors, but house prices are still expected to rise strongly in 2024, he said.

We believe the UK housing market is in the early stages of a cyclical recovery, which should bode well for house prices next year. Mortgage rates are falling, the buy versus rent equation is tilting more in favor of buying and the Labor government has made housing a priority.

That said, there are certainly risks to this theory, and the threat of stagflation in the UK could certainly throw a spanner in the works.

What will be UK house price growth in 2024?

House prices fell slightly in December last year, but rose in 2024.

However, opinions differ as to how much it is. Large banks provide loans directly to consumers and are therefore a useful source of UK housing and mortgage data.

In early 2025, Halifax and Nationwide both released housing indices, both derived from mortgage approvals. Nationwide claimed that UK house prices will rise by an average of 4.7% in 2024. Halifax put the figure at a more modest 3.3%. This is also reflected in data from the Office for National Statistics, which shows average house prices rising by 3.4% to 292,000 in the 12 months to October 2024. (The official data is from realized sales prices, but due to the longer lag, Halifax /Nationwide is considered a more timely snapshot of the market.)

Despite widespread agreement that house price growth is healthy, Alice Haine, personal finance analyst at Bestinvest, says there are reasons to be skeptical this year.

She said the two rate cuts in 2024 did not fully ease the mortgage pain for many borrowers.

Average two-year and five-year mortgage rates ended the year lower than they started, but December's higher inflation numbers could potentially slow the pace of rate cuts in 2025. That means mortgage rates may not fall as quickly as they did this year. Many borrowers will want this.

The stamp duty deadline could, for now, boost UK house prices.

Nevertheless, one of the factors strengthening near-term demand already in 2025 is stamp duty.

The temporary cut to stamp duty ends on March 31, giving hopeful UK homebuyers around 10 weeks to complete their purchase before the changes.

The temporary stamp duty relief first introduced by the Conservative government in 2022 ends on March 31, setting a threshold for people to start paying this property purchase tax before it reverts to previous levels, explains Haine.

This will hit the next generation of property buyers particularly hard – first-time buyers. They need to save enough money to cover higher taxes as well as a deposit.

As a result, property prices may rise by the closing date as buyers and sellers compete to beat tax increases. After early April, home price growth could slow further if buyers turn to cheaper homes to reduce their tax bills or negotiate more aggressively to keep their desired properties affordable.

How can the economy affect UK house prices?

If there's one thing Whitehall politicians worry about, it's the combined effects of inflation and low growth. It refers to a stagflation phenomenon in which stagnant economic growth and rising prices combine to put a burden on living costs and reduce consumer spending in the real economy.

The UK's gross domestic product (GDP) growth is expected to be around 1.1% for all of 2024, according to the Office for Budget Responsibility. But the body doesn't have the best track record when it comes to predicting growth. Short-term GDP calculations show worrying numbers. A repeat of the technological recession seen in late 2022 and 2023 does not seem far off.

The Bank of England is currently keeping interest rates relatively high in a bid to quell inflation, but this also risks dampening economic activity as more money is spent on debt repayments. Additionally, businesses will have to cover higher costs this year due to changes to employer national insurance and the national living wage.

This creates the risk of higher prices and a further decline in economic activity as costs are passed on to consumers and money earmarked for investment is diverted to taxes.

And then there are mortgage delays. Around 74% of UK mortgage holders are on a fixed rate deal. Although interest rates have already fallen twice in 2024, debt service costs are likely to rise further as savers remortgage into more expensive deals to reflect the higher interest rate environment.

The overall effect could be one of budget pressure and a decline in consumer and business confidence. Low confidence is unlikely to increase home sales, or at least make you less willing to pay an inflated asking price. Economists examining UK foreclosure data will note an upward trend here. Although this only makes up a very small portion of outstanding mortgages.

UK house prices also rise due to limited supply

It's not all about mortgages.

Generational changes in home equity mean that most homeowners in the UK actually do not have a mortgage.

This change occurred in 2023, driven by a wave of money saved during the pandemic, which continues to be visible in the data. As of March 2024, around half of UK adults are homeowners, and within this group, 28% are full-time owners. About 22% are homeowners with a conventional mortgage.

These unsecured homeowners will be hoping that supply/demand factors will continue to increase property values. For some time, the UK housing market has been driven by huge demand and limited supply. Changes in mortgage rates won't affect this lucky group, but they are likely to affect potential homebuyers, especially if downsizing is their reason for selling.

As you might expect, politicians of all stripes have repeatedly promised to solve Britain's housing problems. The Labor government has pledged to build 1.5 million homes by 2029 and reduce planning restrictions, but it is housing developers rather than government departments that build homes. This is a tricky balancing act. Given the enormous task the government has set for itself, there seems little risk of a supply glut hitting house prices, but falling demand could certainly put a brake on price growth.

The biggest questions home builders like Persimmon PSN, Bellway BWY, Taylor Wimpey TW. and Barratt Developments BDEV are asking themselves are: Do people want to buy? If the answer is not as hopeful as the government would like, there will be little Keir Starmer can do.

The author owns no shares of any securities mentioned in this article. Learn about Morningstar's editorial policy.

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