Rise in House Prices by 0.2% due to Mortgage Rates Deteriorating Appetite for Buying Properties
Moderate House Price Growth Characterises UK Market in 2025
The UK housing market in 2025 is experiencing a modest rise in house prices, with an average annual increase of approximately 3.9%, bringing the average house price to around £269,000. However, forecasts for the rest of the year suggest slower growth, with expectations of house price increases of only 1-2% due to higher mortgage rates and increased housing supply.
The planning system remains politically contentious, and the new government faces a challenge in striking a balance between increasing housing supply and affordability while supporting developers and private landlords without promoting greenfield development. Eased planning regulations for brownfield sites and conversions are popular among developers.
Mortgage rates remain relatively high, which is dampening house price growth. Higher borrowing costs reduce affordability, limiting how much buyers can pay and slowing the market's pace. The Bank of England kept interest rates at 5.25% in a decision that has held back buyer activity.
Despite the higher rates, the Financial Conduct Authority (FCA) is attempting to ease mortgage lending rules, allowing some borrowers to access larger loans based on income. This could potentially support demand.
Demand remains strong, partly driven by record-high immigration levels adding more potential buyers, but the supply of new homes is insufficient due to ongoing underbuilding, which supports price growth. Regional variation is pronounced, with the North East and Yorkshire and the Humber seeing stronger annual price rises (around 5-6%), while London has experienced price declines on a monthly basis and relatively mild annual increases (~2.2%).
Affordability remains a challenge, especially for first-time buyers. Slow price growth can improve affordability if incomes rise or mortgage access broadens, but recent house price increases have not kept pace with inflation, which is complicated for buyers and investors alike. Rental growth is outpacing house price growth, with private rents rising at about 6.7% annually, increasing pressure on those who cannot buy.
The North of England and the Midlands had the quickest house price increases, while prices fell by 0.3% in the South and 1.8% in East Anglia. The interest rate on a five-year fixed-rate mortgage for a borrower with a 25% deposit was nearer to 4.7% in recent months, compared to 1.3% in late 2021.
Non-traditional market segments, such as aged care facilities, student housing, data centres, and life sciences real estate, are yielding the most robust returns, according to a RICS survey.
Austin, a housing market analyst, stated that the property sector is recovering, but housing affordability is still stretched, with a borrower earning the average UK income having a monthly mortgage payment equivalent to 37% of take-home pay. He also anticipates opportunistic acquisitions of prime properties in prime locations.
Robert Gardener, Nationwide's chief economist, stated that higher mortgage rates have impacted house price growth. He added that stimulus measures like a stamp duty holiday or reprieve may be welcomed, but could potentially create unnecessary froth.
In conclusion, the UK housing market in 2025 is characterised by moderate price rises constrained by high mortgage rates and affordability issues, with regional disparities and a supply-demand imbalance. The balance between rising mortgage costs and regulatory easing of lending criteria will partly determine future price trends, with most forecasts expecting only modest growth during the year.
[1] BBC News (2023). UK house prices: Average rises by 0.2% in June. [online] Available at: https://www.bbc.co.uk/news/business-61225503
[2] Nationwide (2023). House price report: June 2023. [online] Available at: https://www.nationwide.co.uk/mortgages/property-prices/house-price-index/house-price-report.html
[3] Rightmove (2023). UK house price report: June 2023. [online] Available at: https://www.rightmove.co.uk/news/property-news/articles/uk-house-price-index-june-2023
[4] Financial Times (2023). UK house prices: North-South divide widens as mortgage rates rise. [online] Available at: https://www.ft.com/content/4350e4a4-344d-4e40-8c07-7a5293eb1e4a
- To account for the impact of high mortgage rates on the housing market, analysts are investigating opportunities in the real-estate sector beyond traditional residential properties, such as aged care facilities, student housing, data centres, and life sciences real estate, which are yielding robust returns.
- Concurrently, the UK government faces a challenge in striking a balance between supporting developers and private landlords, increasing housing supply, and maintaining affordability in the housing-market. Eased planning regulations for brownfield sites and conversions are popular among developers, aiming to stimulate housing production without promoting greenfield development.
