Uk Average House Prices To Increase By 23.4% Over The Next Five Years
Mainstream house prices:
• House prices to increase by 4% in 2025 (up from a previous forecast of 3.5%) or £14,500, and by 23.4% in the five years to 2029
• Unwinding pandemic trends to soften growth in South West and East of England below that of the capital
• Markets in the North, where mortgaged buyers are under less strain, to see the strongest acceleration in growth (28-29% growth by 2029)
Transaction numbers:
• Transactions expected to remain slightly below their pre-pandemic average over the next five years, peaking at 1,150,000 in 2028
• Home movers to drive housing market activity once mortgage rates have settled
• But first-time buyer activity will be slower to recover due to lack of government support
• Dampened demand from both cash and mortgaged buy-to-let investors is expected due to greater regulation in the private rented sector and increase to SDLT second-home surcharge
Average house prices in the UK are set to increase by £84,000 over the next five years, according to the latest house price forecast from Savills.
With inflation returning to the 2% target and the prospect that interest rates will continue to fall over the next two years, house prices are expected to return to consistent year-on-year growth.
The five-year mainstream house price forecast recently launched by Savills expects house prices to increase by 4% in 2025 (up from 3.5% previously) or £14,500, and by 23.4% by the end of the five years to 2029, as mortgage rates ease and a wide range of home movers are brought back into the market.
Light at the end of the tunnel
The impact of the cost of living crisis and rising mortgage rates is still felt by the UK housing market.
While house prices are now -2.3% below their August 2022 peak on a nominal basis, in real terms (adjusting for inflation), they have fallen by -10.5% over this period, according to Nationwide and the ONS.
Now that inflation is back on target, a return to real house price growth of 11% over the next five years is forecast. This will take inflation adjusted prices back to where they were before the mini-budget.
Lucian Cook, Head, Residential Research, Savills comments, “With less external noise, house prices in the medium term will be dictated by the fundamentals of demand, supply and affordability.”
“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.
“A steady improvement in affordability should allow for house price growth to gain momentum over the next couple of years. But there is still some potential for a bumpy ride. The market will remain sensitive to short-term fluctuations in the cost of debt and changes to property taxation have the potential to cause some short-term disruption.”
Activity to gradually improve, but recovery won’t be uniform
Lower levels of transactions over the past two years have been a product of a harsher mortgage rate environment. This has had the most significant impact on home movers, typically most exposed to mortgage debt. In Q2 2024 home mover transactions fell below the level seen in 2008/09, according to Savills.
Overall, transactions are expected to remain slightly below their pre-pandemic average over the next five years, peaking at 1,150,000 in 2028, but recovery will not be uniform.
Emily Williams, Director, Research, Savills shares, “Looking ahead we can expect some home movers to continue to hold off on moving until rates settle in 2027, when they will have also benefited from several years of house price growth to build up equity. As such, there is potential for a sharp rise in activity among second and third steppers in the second half of our forecast period, as pent-up demand from the period of high interest rates is released.
“However, the number of first-time buyers active in the market is expected to stay below pre-pandemic levels due to a lack of any government support to replace Help to Buy. While increased regulation in the rental sector, combined with the newly increased second-home surcharge, will further dampen demand from both cash and mortgaged buy-to-let investors.”
Ruben Koh, Senior Director, Head, International Residential Sales, Savills Singapore says, “Interest rates will be at the forefront for most overseas investors. As we head into a rate lowering cycle, in my opinion, overseas investors looking to build their property portfolio will begin to explore investing in areas in the UK with huge tenant population.”