Residential forecast 2024
Our outlook for the residential market this year and into 2025.
At a glance:
- Modest 1% growth in UK average house prices this year as declines reverse
- Prime London prices will be unchanged after a 1.1% fall in 2023
- Activity in the prime London rental market will remain buoyant but rental growth will ease to +2.5%
| Year | UK House Prices | Prime London Prices | Prime London Rents |
|---|---|---|---|
| 2023 | -2.3% | -1.1% | +4.4% |
| 2024 | +1.0% | +0.0% | +2.5% |
| 2025 | +4.0% | +3.5% | +3.0% |
Changing mood music
Last year started as a very challenging year for the economy which was still absorbing the shockwaves from the mini-budget in September 2022. The inflation rate was still in double-digits, the base rate kept rising and economic growth was anaemic.
But the mood music changed towards the end of the year as inflation fell sharply and the Bank of England called a halt to rate rises. The Monetary Policy Committee has held rates steady at 5.25% since August last year, ending 14 consecutive rate hikes since late 2021.
The reason the Bank felt it could ease up on rate rises was the better-than-expected data on inflation in the UK. After surprising to the upside over the summer, inflation started to fall sharply from September, hitting 3.9% in November, down from 10.1% at the start of last year. The data reflects energy costs falling out of the annual comparisons, as well as reduced transport costs and an easing in the rise in the cost of food and recreation pulling down the headline rate.
Inflation ticked up slightly to 4% in December, and it remains at nearly double the target rate of 2% inflation, yet the better-than-expected figures during the last months of last year gave rise to hopes that the Bank of England may start to cut interest rates earlier than expected. This in turn put downward pressure on the money market rates which determined fixed-rate pricing for mortgages, giving homebuyers more leeway as mortgage rates started to fall towards the end of the year.
None of these factors are expected to deliver more convincing economic growth in 2024, but they have combined to create conditions for a more robust housing market than many anticipated at the start of last year.
While the positive data on inflation, and the fall in mortgage rates has no doubt contributed to this, there have been some other factors at play. Firstly, while affordability levels remain stretched compared to historical norms, the house price to earnings ratio has fallen in recent months, due to the larger rises in wages over the last 12-18 months while house prices were easing.
The second factor is around mortgage stress tests, which mean most borrowers were firmly tested to ensure they could afford a significant rise in their monthly repayments before they were granted a loan. Finally, and crucially, mortgage lenders’ are taking an accommodative approach to homeowners who are facing large repayment rises. Payment holidays, shifting to interest-only mortgages or extending mortgage terms are tools that can be used to minimise the rise in monthly outgoings. These tools allow homeowners who are stretched by additional payments (some 1.6 million homeowners will remortgage this year), amid the higher cost of living, can stay put rather than seeking a quick or forced sale of their home.
While home values have held up better than expected, the volume of sales in 2023 has been more reflective of the challenging conditions in the market. The number of transactions so far this year is running below the historic average, amid tighter supply – which has also supported prices. The last time transactions fell to 2023 levels was in 2020, when the housing market was shut down at the start of the pandemic, and also in 2012 and 2013 when the market was still recovering from the global financial crisis.
We had forecast a fall in average UK house prices of -8% in 2023, but as the year ended, the monthly price declines evident in the first half of the year reversed. Overall house prices fell by -1.8% in the year to December, according to Nationwide’s monthly national data.
On a quarterly regional basis, a slightly different index also produced by Nationwide, overall house prices dipped by -2.3% during the year, with price falls up of up to -5.2% in East Anglia. But the housing market surprised to the upside during the year in terms of capital values.
The UK sales market in 2024
We expect that average UK house prices will edge up by 1% this year. Recent cuts to mortgage rates, with more to come, amid improving confidence and a steady jobs market will provide a fillip to the market and reverse the current annual decline in prices. However, affordability is still stretched. In some parts of the UK, average home values are still 20% or more above pre-pandemic levels even after recent falls. This, coupled with higher mortgage rates (albeit not as high as last year), will limit any significant growth in values this year before more substantial growth in 2025 as rates continue to fall and the economy picks up momentum. Transactions will be higher this year than last year, but will be in line with historical norms.
Upside risks Price growth could register a stronger rise if interest rates fall faster than anticipated, and if the economy outperforms. Any reduction in stamp duty pre-election could also boost the market, as could any policies aimed at helping first-time buyers onto the housing ladder.
Downside risks Price growth could underperform if inflation is pushed up once more by events in the Middle East, causing inflation to stick or rise, meaning slower rate cuts. Any sudden rise in supply, via forced sales or even tougher legislation for landlords, will also put downward pressure on pricing.
Prime London sales market in 2024
After posting moderate growth since the start of 2020, price growth reversed in summer last year, and average prices across the whole prime London market were down -1.1% at the end of the year, although this was up from the -2.1% annual decline at the end of September.
Just like the rest of the UK, rising mortgage rates had an impact on the prime London market during 2023, affecting sentiment and activity. There was a further drag on transactions as buyers and sellers in some instances were on different pages about pricing. Where properties were well priced there were examples of competitive bidding in the market, showing some evidence of pent-up demand in this market.
Overseas buyers and cash buyers were active in the market in 2023, and will continue to be so in 2024, with dollar-based buyers taking advantage of the relative weakness of the pound. Also, the prime London market trailed other markets during the pandemic, with average values up only 3% compared to March 2020, signalling added value for some buyers.
Further mortgage rates cuts will underpin demand this year, especially in the Eastern fringe. Overseas buyers, especially those in prime central London may be encouraged to make a move before the Election, as Labour have pledged to increase stamp duty for non-resident buyers by a further 2%. However, Labour have also pledged to abolish the non-dom tax status, which could affect demand in some parts of this market as the changes are absorbed.
We forecast that prime London prices will remain unchanged in 2024, although activity could start to pick up. Prices will gain momentum in 2025, rising by +3.5%.
Upside risks Base rates, and mortgage rates, fall faster than expected, increasing demand.
Downside risks Base rates fall more slowly than expected, and sluggish economic growth leads to less robust jobs market in the city.
Prime London rental market
The UK rental market remained strong in 2023 as demand continued to outstrip supply, albeit to a lesser extent than in 2022. This led to strong rental growth, of 6.2% across the UK in the 12 months to October. Rental growth in the prime London market peaked in 2022, but there was still strong rental growth for most of 2022, with average rents ending the year up 4.4%.
There is now increasing evidence that supply is rising, and that demand is slowing in the face of higher rents for some properties in the prime London market (as well as the UK market) amid stretched affordability. Nearly 10% of rental properties put on market across the whole of London had a cut to the asking rent of 5% or more in November, according to data from Zoopla, up from around 3% at the end of last year, underlining the change in the market in the capital.
The demand for rental properties will remain strong, but as falling interest rates and rising wages increase the opportunity for potential first-time buyers to climb onto the housing ladder, and supply of rental properties increase, the upward momentum in rents will continue to slow, especially after an 25% rise in average London rents since March 2021.
We forecast that average prime London rents will rise by +2.5% this year, climbing by a further +3% in 2025.
Upside risks Tighter than expected supply underpins higher rental growth
Downside risks Changing employment picture impacts demand in London
The prime London market comprises the most desirable properties in terms of location and value. The prime London market comprises prime central London (largely within zone 1), prime north west London, prime south west London, prime west London and prime North and East London, and these cover the most desirable locations, which usually lie in zones 2 or 3.
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