Homeowners and investors are hoping for another year of house price growth in 2025, and they could well get it – provided the UK economy doesn’t spoil the show.
Despite a dip in prices in December, UK house prices grew 3.3% across the year, and in defiance of the highest interest rates since 2008.
You would think higher rates would cool demand, as higher monthly mortgage payments look less attractive to prospective buyers.
But there is tentative evidence of a broader cyclical recovery in the UK housing market. Interest rates have begun to fall, with two rate cuts in 2024 and at least one more this year. Mortgage rates have also been falling. Talk of building houses has returned to politics.
According to MoneyFacts’ UK Mortgage Trends report, at the start of January 2024, the average five-year fixed-rate mortgage was 5.55%; at the start of 2025, it is now 5.25%, a 0.30% reduction. The average two-year fixed rate has also dropped by 0.45% over the same period, and is down to 5.48% from 5.93%.
Michael Field, Morningstar’s European market strategist, says these factors should make homeowners confident in 2025.
“December’s weakness in housing prices might have caused jitters amongst investors, but house prices still rose strongly in 2024,” he says.
“We believe the UK housing market is at 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 tipping further in the favour of buy, and the Labour government has made housing a priority.
“That said, there are clearly risks to the thesis, and the threat of stagflation in the UK could certainly throw a spanner in the works.”
What Was UK House Price Growth in 2024?
Though house prices fell slightly in December last year, they rose in 2024.
There is disagreement over how much, however. Large banks are a fruitful source of UK housing and mortgage data, as they lend directly to consumers.
At the start of 2025, Halifax and Nationwide both published housing indexes, and both are drawn from mortgage approvals. Nationwide claimed UK house prices rose by an average of 4.7% in 2024. Halifax put the figure at a more modest 3.3%. It is echoed by data from the Office For National Statistics, which shows average house prices increased by 3.4% to £292,000 in the 12 months to October 2024. (The official data comes from realized sale prices, but there’s a longer timelag, so Halifax/Nationwide are considered more timely “snapshots” of the market.)
Despite broad agreement that house price growth is healthy, Alice Haine, personal finance analyst at Bestinvest, says there are reasons to be sceptical this year.
“Two interest rate cuts in 2024 have not entirely eased the mortgage misery for many borrowers,” she says.
“While average two and five-year mortgage rates did end the year lower than they started it, a higher inflation reading in December could result in a potentially slower pace of rate reductions in 2025. It means mortgage rates may not be heading downwards as fast as many borrowers would like.”
Stamp Duty Deadline Could Fuel UK House Price Growth, For Now
Despite this, one factor bolstering short-term demand already in 2025 is stamp duty.
A temporary cut to stamp duty will end on Mar. 31, leaving hopeful UK homebuyers around 10 weeks to complete purchases before the change.
“The temporary stamp duty relief first introduced by the Conservative government in 2022 ends on March 31, with the thresholds at which people start paying this property purchase tax then set to revert to the previous levels,” Haine explains.
“This will deliver a particularly heavy hit to first-time buyers, the next generation of property purchasers, who will not only need to raise enough money for a deposit but also enough to cover the higher tax bill.
“As a result, property prices may rise in the run-up to the deadline as buyers and sellers race to beat the tax hike. Beyond the start of April, house price growth may be more subdued if buyers pivot towards cheaper homes to reduce their tax bill or negotiate more aggressively to ensure their desired property remains affordable.”
How Could the Economy Affect UK House Prices?
If there is one thing politicians on Whitehall are worried about, it’s the combined effects of inflation and low growth. This is a phenomenon known as “stagflation”, where stagnating economic growth meets rising prices, putting pressure on the cost of living and choking consumer spending in the real economy.
UK growth figures for gross domestic product are projected to be around 1.1% for the whole of 2024, according to the Office for Budget Responsibility. But the body has not had the best track record on predicting growth. Shorter-term GDP calculations show worrying numbers. A repeat of the technical recessions seen in 2022 and at the end of 2023 never feels far away.
The Bank of England is currently keeping rates relatively high in a bid to cool price rises, but that also risks a drop-off in economic activity as more money is spent on servicing debt. In addition, businesses will have to contend with higher costs this year, following changes made to employer national insurance and the national living wage.
This creates the risk of yet more price rises and even less economic activity as they pass on those costs to consumers and divert monies earmarked for investment towards tax.
And then there is the mortgage lag. About 74% of UK mortgage holders are on fixed-rate deals. Though interest rates have fallen twice already in 2024, the cost of servicing their debt is likely to be higher as those savers remortgage onto more expensive deals that reflect the higher interest rate environment.
The overall effect could be one of squeezed budgets and declining consumer and business confidence. Low confidence is unlikely to result in more house sales, or least an unwillingness to pay inflated asking prices. Economists looking at the UK’s repossession data will note a rising trend here, although this makes up a very small part of outstanding mortgages.
UK House Prices Also Driven by Limited Supply
It’s not all about mortgages.
A generational shift in housing wealth means that most homeowners in the UK are now actually mortgage-free.
This shift occurred back in 2023, helped by a wave of money saved during the pandemic, but it continues to be visible in the data. As of March 2024, approximately half UK adults are homeowners, and, within that group, 28% are outright owners. Some 22% are homeowners via an existing mortgage.
These mortgage-free homeowners will be hoping that supply and demand factors continue to boost their property valuations. For some time, the UK’s housing market has been driven by huge demand and limited supply. Changes in mortgage rates will not affect this fortunate cohort, but it is likely to impact on those who might buy their houses, especially if “downsizing” is the reason for the sale.
Precisely as you would expect, politicians of all stripes have repeatedly promised to fix the UK’s housing supply issues. The Labour government has committed to build 1.5 million homes in by 2029 and reduce planning restrictions, but it’s not government departments that build houses: it’s housing developers. This is a tricky balancing act. There seems little risk of over-supply hitting house prices, given the gargantuan task the government has set itself, but lower demand could certainly put the breaks on price growth.
The big question listed housebuilders like Persimmon PSN, Bellway BWY, Taylor Wimpey TW., Barratt Developments BDEV will ask themselves is: do people want to buy? If the answer is not as hopeful as the government likes, there is very little Keir Starmer will be able to do.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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