UK property market forecast: will house prices stagnate?

House prices in the UK, according to Zoopla, have risen just 2.2% in the past year, while the cost of flats rose only 0.5%. Halifax’s estimate of annual house price growth is 2.9%, but Nationwide is more bullish. It records a 3.1% year-on-year increase for the fourth quarter in England, 2.7% in Wales, 4.4% in Scotland and 7.1% in Northern Ireland. The estimate for England hides a significant regional variation: prices were 4.4% higher in the Midlands and the north of England, but just 2% higher in southern England. In East Anglia, prices rose just 0.5%.

Nationwide and Halifax also produce monthly data, but this can be erratic. The numbers provided by different sources always differ as they can come from surveys of estate agents, deals completed, or mortgages arranged. The data from transactions may not be representative of the market as a whole. It will exclude properties that don’t sell, or omit some private transactions. It is, in other words, not very reliable.

Yet the presumption is that house prices rise remorselessly with only occasional interruptions: they always have and they always will. That presumption is built into the behaviour of buyers. If your home will always rise in value, capital gains tax-free, you might as well buy somewhere bigger than you really need in a more expensive location. If buying to rent, you will accept a low rental yield, as it will be topped up by capital appreciation.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Nationwide, however, points out that prices at the end of 2024 “were still just below the all-time high recorded in summer 2022”. Its regional numbers suggest that price increases in the north represented a catch-up with London and the southeast. If so, they will now slow down.

At the top of the market (prime central London) “the market has gone nowhere in the last ten years”, says Charlie Ellingworth of Property Vision. “There have been some spectacular sales, but these are outliers in a market that remains broadly flat.” This end of the market is suffering from the exodus of non-domiciles, accelerated by their being dragged into the inheritance tax (IHT) net in the last budget. Equally important, says Ellingworth, is that potential buyers from overseas have been put off.

A post-Covid collapse of the housing market

The country market, he says, “had a noticeable spike over the Covid years that has unravelled recently, reflecting the retreat from working from home”. However, “the internet and working from home have enabled people to extend their weekend and live further away”, so good properties in good locations remain popular. This is also true in London where major developments that offer “good transport links and a good range of shops, cafes and restaurants” are popular – unlike “so many of the riverside developments that future generations will regard as sad failures”.

In the broader market, affordability is improving as earnings rise, but the house price-to-earnings ratio is still well above the long-term average. Moreover, this does not take account of higher interest rates, which could fall back to 4%, but not to the sub-1% levels of a few years ago. Mortgage borrowers have been protected by the availability a few years ago of low fixed rates, but these deals are rapidly expiring.

The gauge of affordability also omits the relentless rise of stamp duty, soon to be zero on just the first £125,000. A buyer will pay 3% on a property costing £500,000, 4.4% on £1 million and the marginal rate rises from 10% to 12% above £1.5 million. First-time buyers pay a little less if buying a property for under £625,000, but buyers of second homes will pay an extra 5% and non-residents an extra 2%.

With many councils in financial difficulties, council tax is set to rise well above the rate of inflation. Those buying second homes will have to pay double tax, having paid only half ten years ago. For those buying flats, service charges are escalating rapidly, especially if remedial action for cladding is necessary. This probably explains why, as Zoopla reports, price increases for flats are lagging those for houses.

Buy-to-let investors and those letting out holiday homes are facing the cost of achieving the required level of energy-performance certificates; rising management costs; higher taxation on net income, with reduced deductions before net income is calculated; and higher capital gains tax on disposal. In holiday locations, locals have complained about being priced out of the market. But without the tourist trade, they wouldn’t want to live there.

The attraction of buy-to-let investing has always been not just a reasonable level of net income, rising at least in line with inflation, but also the prospect of capital gains. But if costs, taxes and regulations are eating away the net income, the capital gains will disappear, and without them the investor needs a considerably higher level of net income. No wonder so many are selling – but the prospective returns are not attractive to buyers.

The same applies to home buyers. If price rises are no longer expected, the incentive to buy the biggest property you can afford disappears and the inclination to downsize in later life increases. Confidence in higher prices made that confidence self-fulfilling. Now, the reverse could apply. “Housing was the goose that laid the golden egg for successive governments, enabling them to tax, tax and tax again,” says one developer.

But surely the UK is chronically short of housing? The government’s plan to build (or have the private sector build) 300,000 new homes a year for five years has been much criticised, with the industry pointing to shortages of labour, materials and sites.

Taking on the NIMBYs

Still, the intended changes to planning laws will presumably proceed and have some effect in increasing supply. As Ellingworth points out, “Labour is a predominantly urban party with little sympathy for countryside” concerns of NIMBYs.

Recently, The Telegraph reported that “UK golf courses were under siege by Rachel Reeves’s build, build, build mantra”. The article claimed that “at least one in six of the country’s courses are so distressed that they could face imminent closure. Already this year, the courses that have either shut or been earmarked to shut are running into double figures, with at least three making way for new houses”.

“It is easier than ever to construct on the green belt and more straightforward for planning inspectors to wave through projects, even if they have previously been rejected by council planning committees.”

The main thing deterring demand is household formation, which, according to Statista, has averaged growth of 0.6% per annum in the last ten years, but 0.4% in the last year, 2023. This is very similar to population growth, so household sizes are no longer falling. With the fertility rate now well below replacement level, population growth and hence household formation is dependent on immigration. It must be presumed that this government or the next one will significantly restrict immigration, as nearly all other developed countries are now doing.

When this happens, population growth and hence household formation will turn negative, while housing supply will be growing. This is not a recipe for rising prices. Rising building costs, exacerbated by inflation in wages and the price of materials, and the increase in national insurance and regulation should result in a squeeze on housebuilders’ profits and lower land values rather than feed through into the price of new homes and hence the value of existing ones.

Perhaps people will learn that a residential property is a place to live in for a long period of time, rather than an investment. There will always be bargains based on quality, mis-pricings and location. But the days when a rising market would bail you out from overpaying are surely over.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.