The property market is ending 2024 on a high but how will house prices fare next year?
Homebuyers and sellers faced plenty of challenges during 2024, with high mortgage rates dampening demand at the start of the year, but slowing inflation and interest rate cuts in recent months have brought confidence back to the market.
Data from Nationwide and Halifax even shows that house price growth is at a two-year high and average values have surpassed their pandemic peak.
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That is despite mortgage rates remaining higher than in recent years, although they have been falling.
Robert Gardner, chief economist for Nationwide, said: “Mortgage market activity and house prices proved surprisingly resilient in 2024 given the ongoing affordability challenges facing potential buyers.
“It was encouraging that activity levels in the housing market increased over the course of 2024. The number of mortgages approved for house purchase each month rose above pre-pandemic levels towards the end of the year.
“Similarly, after starting the year registering small annual declines, the pace of house growth moved firmly into positive territory, approaching 4% in November.”
Many lenders and estate agents anticipate that this confidence will continue into 2025, especially if interest rates and mortgage pricing falls further.
But there are still challenges ahead for the market.
Tax changes in the Autumn Budget such as capital gains tax hikes as well as raising the additional rate of stamp duty from 3% to 5% will likely influence purchasing decisions.
Additionally, stamp duty thresholds are set to fall in April 2025 – adding to the cost of buying a property.
The outlook for the property market in 2025
It won’t be high mortgage rates or inflation that solely concern homebuyers in 2025.
Many analysts expect the main driver early next year to be a rush to beat changes in stamp duty thresholds.
First-time buyer stamp duty relief is set to drop from £425,000 to £300,000 from April 2025, while home movers will start paying the controversial tax from £125,000 instead of £250,000
Gardner said: “Upcoming changes to stamp duty are likely to generate volatility, as buyers bring forward their purchases to avoid the additional tax.
“This will lead to a jump in transactions in the first three months of 2025, especially in March, and a corresponding period of weakness in the following three to six months, as occurred in the wake of previous stamp duty changes. This will make it more difficult to discern the underlying strength of the market.”
While stamp duty will be a challenge, and agents expect some sellers may have to reduce prices if buyers miss the deadline, there is an argument that the market will also benefit from political stability.
Nick Leeming, chairman of Jackson-Stops, said: “With the political landscape looking more settled and the shockwaves from the October Budget subsiding, we have every reason to expect a more balanced market in 2025.
“This newfound equilibrium will be beneficial for both buyers and sellers, fostering an environment where transactions can proceed with greater confidence and predictability. We anticipate that this stability will encourage more people to enter the market, whether they are first-time buyers or those looking to move up the property ladder.”
The estate agency brand is predicting that upsizing families and downsizing retirees will drive the market in 2025.
Will house prices rise or fall in 2025?
House prices may get a boost from increased demand ahead of the stamp duty deadline but that may be balanced out if there is a lull in activity post-April.
Gardner said: “Providing the economy continues to recover steadily, as we expect, the underlying pace of housing market activity is likely to continue to strengthen gradually as affordability constraints ease through a combination of modestly lower interest rates and earnings outpacing house price growth, where the latter is likely to remain broadly in the 2-4% range in 2025.”
Homeowners may also become more positive about putting their home on the market and Rightmove predicts that new seller asking prices will rise by a further 4% overall in 2025, aided by anticipated mortgage rate falls, which would help to stimulate activity.
But agency brand Knight Frank warns tax changes in the Budget are making the market harder to predict, especially as mortgage rates rose slightly in the aftermath and the pace of interest rate cut expectations has slowed.
As a result of the more adverse rate environment, Knight Frank now expects average UK house price growth of 2.5% in 2025, 3% in 2026, and 3.5% in 2027 down from its August forecast of 3%, 4% and 5% respectively.
Meanwhile, Savills is predicting that the prime markets, where investors are worst-hit by extra stamp duty charges and changes to non-dom rules, will suffer the most.
It is expecting prime London house prices to fall by 4% in 2025 compared with a forecast of a 4% rise in the mainstream UK market.
Lucian Cook, head of residential research at Savills, said: “In a normal housing market recovery, you would expect the top-end of the market to recover first, responding quickest to a change in sentiment.
“However, the additional stamp duty surcharge for second homes, changes in ‘non-doms’ taxation and VAT on school fees are likely to offset some of the impacts of future cuts in interest rates this time around.”