Recovery; but not as you have previously known it
The housing market of the last four years has been very different to what came before it. Greater friction on the world stage has created a sense of uncertainty around the direction of both economics and politics. Correspondingly, interest rates are higher and will stay that way until the latest bout of inflation passes. In this new era, what do we think are the key drivers in the housing market?
For many buyers the main question remains the same: how much is my mortgage going to cost me?
Structurally higher interest rates have brought this issue to the fore, fundamentally changing the outlook for housing in both the mainstream and prime markets.
Since September 2022, mortgage rates have averaged 4.72%. In that same period, house prices have risen by just 0.3% per year on average in the mainstream market and have fallen by -3.6% and -1.8% per year at the top end of the regional and London markets, respectively. Notably, the adjustment has been much greater on an inflation adjusted basis.
The decade before, mainstream prices rose by 5.2% per year on average, 2.7% in prime regional markets. In part that was fuelled by the post-pandemic mini-housing market boom, but it also sat against an average mortgage rate of 2.25% over that 10-year period.
The rock-bottom rates of the 2010s are a distant memory, and – crucially - the base rate is forecast to stay higher in the long term than previously expected. Oxford Economics has pencilled in two interest rate rises in the short term. It now expects bank base rate to bottom out at 3.0% over the medium term, shown in Figure 1 below.
Affordability pressure will ease as the base rate drops over 2028 and 2029, and we believe house prices will recover as this happens. But with higher rates the new norm, buyers will still be left spending a higher proportion of their income on their mortgage over the long term.
Several factors will still support demand in this new era and will allow households to borrow more to fund home purchases. At a headline level, house price-to-earnings ratios are the lowest they’ve been for a decade. And mortgage regulation allows more lending at higher loan-to-income ratios.
So while mortgage payments are more expensive, borrowing capacity is reduced by much less. This gives us confidence that households can sustain higher mortgage payments. That means house prices will continue to rise in the long term, even if their rate of growth is lower than some homeowners have been used to.
Searching for an economic impetus
Another question is whether there will be sufficient strength in the economy to give people the confidence to pay more when they purchase a new home.
Most major western economies are contending with fairly weak economic growth forecasts. But the UK labour market is proving resilient and income growth forecasts are reasonable, which should protect employees from major income shocks in the mainstream market.
The prime markets are more heavily affected by domestic and global wealth generation. The relative steadiness of the UK economy is still attractive to high-net-worth individuals and investors. However, the long-term forecast for about 1.5% real GDP growth isn’t as strong as the historic norm, moderating our expectations.
We’re also in a new era in politics, both domestically and globally. The global political landscape has become more fractured and less certain. Not only does this have direct economic impacts, but it also feeds through to consumer confidence. That alone is likely to suppress the extent of any recovery over the short term.
House building
Closer to home, we have seen a shift in political direction. Housebuilding has become a much greater priority for central government, with substantial reform of the planning system. That is yet to bear much fruit and it remains to be seen how much traction the government’s aspirations to embark on “the largest council house building programme for a generation” will gain.
The Your First Home scheme will increase first-time buyer transactions and support housebuilding over its lifetime. But it won’t eradicate the structural undersupply of homes across England and the UK.
Taxation
Each new leader through the revolving door at 10 Downing Street has brought their own views on tax policy as well. The change in how wealth is perceived and taxed has created uncertainty, at the top end of the market in particular. The High Value Council Tax surcharge comes into play in 2028, but in isolation it is more likely to temper a recovery in the prime market than unseat it.
There were no significant tax changes that would affect the market in this year’s Budget. But the fundamental property tax dilemma remains – Stamp Duty blocks market activity and Council Tax is regressive, but to reform the system would require a complicated overhaul and a decrease in short-term tax revenue. No government yet has sought to upset that balance.
So, from a range of perspectives, we have seen a structural shift in the housing landscape. The market of the next five years looks to be very different to the one we left in the 2010s. It is still set to enter its recovery phase over our forecast period, though not with the same degree of growth we have seen historically.
Note: These forecasts apply to average values in the second-hand market. New build values may not move at the same rate
Read the other articles within our Residential Forecasts 2027–2031 below
< To read more of our Residential Research please visit our Residential Hub.
For more information, please contact your nearest local office or arrange a market appraisal with one of our local experts.
