UK House Price Crash: Interest Rate Cuts Aim to Stabilize the Housing Market
- U.K. house prices faced mixed performance in 2024, raising doubts about BoE policy effectiveness.
- House prices started 2025 with a bang for Rightmove and Halifax.
- High interest rates tackled inflation but negatively affected the British housing market.
- However, analysts expect a busy market in 2025.
The U.K. housing market, long admired for its resilience and upward trajectory, now faces mounting questions about its stability.
For years, property prices defied economic turmoil and global crises, continuing their relentless climb.
However, recent shifts in the Bank of England’s (BoE) interest rate policy have introduced ripples of uncertainty.
With the broader economy under strain, concerns are growing that the era of unshakeable price growth may be nearing its end.
This prompts speculation about whether a long-anticipated market correction is on the horizon.
UK Records Increased Prices in March
Property prices in the UK rose in March, according to Rightmove data , with new buyers facing a record-high selection of properties.
The average asking price for homes listed in March is £371,870, marking a 1.1% increase, or £3,876, compared to the same period last year. This aligns with the typical March price rise, as sellers price competitively amid strong market competition.
Rightmove’s weekly mortgage tracker reports that the average five-year fixed mortgage rate is 4.74%, a slight decrease from 4.84% in 2024 but still significantly lower than last summer’s peak of 6.11%.
Despite this, the firm noted that high mortgage rates are still curbing market activity and dampening overall optimism.
The property market is traditionally active in March, and Rightmove has highlighted that buyers this spring have access to the largest selection of properties since 2015. However, this comes as buyers face the upcoming increase in tax charges from April and lose out on additional stamp duty savings.
While global uncertainty continues, Rightmove reported that the property market has remained steady in 2025, with positive growth anticipated in the spring. Sales have risen 9% year-on-year, and new listings are up by 8%, signaling continued market momentum ahead of the April stamp duty changes.
Global Economic Turbulence Hits UK Mortgages
Rightmove’s Matt Smith commented: “We’re still seeing lenders price competitively where they can to secure mortgage business at this typically busy time of year.
“However, the economic turbulence happening globally is impacting mortgage rates, and we’re seeing some small rate fluctuations on a week-by-week basis.”
“Most affected are rates for those with the smallest deposits, which is a double whammy for first-time buyers and those who need to borrow more,” he said.
Looking ahead, Smith continued: “We’ve got the next interest rate decision coming up from the Bank of England, and the current expectation is that we’ll see a hold, followed by a cut in May.”
“However, we’ve already seen this year how quickly things can change, so a lot will depend on other economic news we have between the two Bank of England meetings.”
Market Resilient but Still Weak
UK house price growth slowed slightly in February but remained “resilient” despite affordability challenges, according to Nationwide .
Prices rose 3.9% annually, down from 4.1% in January, and increased 0.4% monthly, marking the sixth consecutive rise.
Housing transactions in the second half of 2024 were up 14% year-on-year but 6% below pre-pandemic levels. First-time buyer mortgage completions were just 5% below 2019 levels despite five-year fixed mortgage rates at 4.4% versus 2% in 2019.
Housing Market Kicked Into Gear
Nationwide’s Robert Gardner expects market “volatility” in April due to stamp duty changes. The zero-rate threshold for first-time buyers will drop to £300,000 from £425,000 and for other buyers to £125,000 from £250,000.
Gardner said the UK housing market will likely see a jump in transactions in March and a corresponding period of weakness in the following months, as occurred in the wake of previous stamp duty changes.”
Matt Swannell, economist at consultancy EY ITEM Club, said, “As interest rates fell through last summer and into the autumn, the housing market kicked into gear, but mortgage rates have risen over the last three months as financial markets now expect fewer interest rate cuts than they did in late summer.”
“Nonetheless, housing demand has held up over the last few months as buyers have prioritized completing before the stamp duty thresholds fall back to normal levels at the end of March,” he added.
Economic Activity May Influence the Housing Market
Rightmove said there are currently more than 550,000 sold homes awaiting legal completion, which is 25% higher than the same time last year.
Applications for a mortgage in principle on Rightmove also hit a record high in January, increasing 49% year over year.
However, Rightmove said that “global and economic news could temper this momentum and affect sentiment and outlook for the market, with attention turning to upcoming inflation and earnings figures.”
Matt Smith, mortgage expert at Rightmove, said: “We’ve now had the first Bank Rate cut of the year, and current forecasts suggest there are still two or potentially three more cuts to come, which could see us closing out the year with a Base Rate of 4% or lower.”
“The response from the market to the decision has been positive, and mortgage rates have trickled downwards since the announcement.”
“We hope this is the beginning of a sustained period of rates slowly heading downwards, and while we’re unlikely to see major falls across the board, we’ve already seen the first sub-4% rates of 2025,” Smith added.
Prices Hit Record High
U.K. house prices reached a record high at the start of the year, according to mortgage lender Halifax’s latest report .
In January, house prices increased by 0.7% compared to December, after a 0.2% decline in December from November.
The average property price now stands at a new record of £299,138.
Despite this increase, the annual growth rate slowed to 3.0% in January from 3.4% in December, marking the slowest annual growth since July.
“While affordability remains a challenge for many potential buyers, the market’s resilience is clear. There’s a strong demand for new mortgages, and lending is growing. With a stamp duty increase on the horizon, some first-time buyers may be rushing to close deals before the end of March,” Halifax analyst Amanda Bryden explained.
A key focus for the U.K. housing market this year is the impending change to stamp duty policy. At the end of March, the temporary increase in the zero-rate stamp duty thresholds will end.
First-time buyers will see the zero-rate band drop to £300,000 from the current £425,000 for homes under £500,000.
For other buyers, the threshold will decrease to £125,000 from £250,000, as announced in the October autumn budget by U.K. Chancellor Rachel Reeves.
Prices Start Year “With a Bang”
According to Rightmove data , U.K. homebuyers began the year with the highest number of properties for sale since 2015. January saw the fastest early-year price growth since before the pandemic.
The average asking price for new listings rose 1.7% in January to £366,189, up from £360,197 in December. This is the strongest price increase since 2020.
Despite this, prices remain nearly £9,000 below the all-time high recorded in May, as buyer affordability remains constrained.
“With a record number of new sellers entering the market from Boxing Day through January, there’s clear pent-up demand to move,” Rightmove stated.
The number of new properties listed is up 11% compared to the same period last year, giving buyers their widest selection at the start of a year since 2015.
Additionally, Rightmove reported its busiest-ever start to a year for mortgage-in-principle applications, signaling strong buyer intent.
“New sellers have started the year with a bang,” analysts at Rightmove noted. However, they warned of potential slowdowns in the months ahead due to increased seller competition, economic uncertainties, and changing market dynamics.
Uncertainty Over BoE Rate Cuts
Despite some positive early indicators, experts remain cautious about the future. “It’s important to look at the bigger market picture, despite the positive early lead indicators that we’re seeing,” Rightmove said.
Many buyers are still grappling with affordability issues, as high mortgage rates limit their borrowing power and reduce their affordability.
Colleen Babcock, an analyst at Rightmove, noted that first-time buyers are facing even greater challenges with reduced support schemes and higher stamp duty fees set to kick in next month, “all while contending with record rents and trying to save up for a deposit.”
Matt Smith, a mortgage analyst, added, “news of high government borrowing costs was swiftly followed by better-than-expected inflation figures, highlighting how quickly the mood can change.”
While markets are anticipating a rate cut in February, Smith cautioned that the outlook beyond that is uncertain. “I think we’ll need to get settled into the year a little more before the direction of travel for rates this year becomes clearer.”
BoE Rate Cuts Have Positive Impact on Confidence
Jason Tebb, president of OnTheMarket, said, “Two interest rate reductions in recent months have had a positive knock-on effect on confidence, which the market relies on. The unwelcome news that inflation has edged upwards to 2.6% is not surprising but still a blow as it may well encourage the Bank of England to delay further rate reductions.”
“Affordability remains a challenge but the market continues to tick along, with focused buyers who may have put plans on hold welcoming lower mortgage rates,” he added.
David Hollingworth, associate director at L&C Mortgages, said, “Mortgage borrowers shouldn’t expect to see much change because of today’s figures,” and added:
“Further base rate cuts are expected next year, but the Bank of England has played a consistent line that those reductions are more likely to be slow and steady in pace. The figures today do nothing to suggest that line is about to change.”
Mortgage rates had edged higher in recent months due to concerns over greater inflationary pressure from the measures announced in the budget.
Asking Prices To Rise in 2025
Tim Bannister, Rightmove’s director of Property Science, said, “We are now looking ahead to the traditional Rightmove Boxing Day bounce in home-mover activity, which has increasingly become a key date in the housing market calendar,” adding:
“Each year, our real-time data can pinpoint the exact moment that the turkey is finished, family games run out of steam, mobile devices are picked up, and prospective movers flood onto Rightmove and get their 2025 move started. If this year is anything like recent years, those early birds who get their search started the day after the festivities are over are likely to be rewarded with plenty of fresh property choices to consider.”
Rightmove said prices are holding up best in the first-time buyer sector, especially homes priced below £300,000.
The analyst expects new seller asking prices to grow by 4% next year, as forecast mortgage rates may drop following the Bank of England’s cuts in interest rates:
“Looking at our data and the U.K.’s underlying housing needs, there are lots of reasons to be positive about next year.”
“However, as we’ve seen several times this year, the market is sensitive to unexpected events, and the direction of travel can change. The stamp duty changes are a cloud over the market at the moment, with some groups much more impacted than others, and therefore keen to avoid the additional charges. After the important first three months of the year in 2025, a lot depends on how quickly normal activity is resumed with higher stamp duty in England. A bank rate cut and some mortgage rate falls early on in the year would help to settle the market and provide a boost to sentiment and consumer confidence,” Bannister added.
Busy 2025 Ahead
Rightmove predicts U.K. house prices will rise by 4% in 2025, marking the most significant growth since 2021. The company expects around 1.15 million transactions, with intense buyer competition due to the many homes available. Despite this, the market will be “a buyers’ market” with limited price growth.
London, which has lagged behind the rest of the U.K., is expected to see price growth in line with or slightly above the national average, driven by increased office returns and demand from workers and international buyers.
Rightmove anticipates mortgage rates will decline to around 4% after four expected base rate cuts, although rates will not return to pre-cost-of-living crisis levels. First-time buyers are expected to remain active despite increased stamp duty in April 2025, with many rushing to complete purchases before the changes.
Additionally, lenders will focus on remortgaging, as many homeowners come to the end of five-year fixed-rate deals taken during the pandemic.
House Sales Pipeline Hits Four-Year High
An estimated £113 billion worth of homes are currently in the U.K. sales pipeline, the highest level since autumn 2020, according to Zoopla.
Around 306,000 homes are progressing toward completion—up 26% from last year. Zoopla notes that sales momentum remains strong and is likely to continue through December, with many recent agreements expected to be completed in early 2025.
The surge in activity is driven by first-time buyers and homeowners who waited for lower mortgage rates. Rising rental costs and easing mortgage rates are also encouraging more first-time buyers to enter the market.
First-Time Buyers Return Amid Lower Mortgage Rates
Richard Donnell, executive director at Zoopla, said:
“It is positive to see the sustained increase in sales activity over 2024, which reflects growing confidence amongst buyers and sellers supported by lower borrowing costs and rising incomes. Overall, the market remains on track for a modest 2% price increase in 2024 and 1.1 million sales. First-time buyer numbers have recovered as mortgage rates have fallen, but a sizeable deposit is still required to buy.”
“The health of the housing market and people’s ability to afford housing is linked to the health of the economy. It’s vital the budget is focused on economic growth, expansion in jobs, and rising incomes. The primary focus should be on providing the financial support and investment needed to help build the homes the nation needs for buyers and renters,” he added.
Chris McLaughlin, director at Bristol-based Ocean Estate Agents, said, “Many sellers, who had transitioned to rental accommodation during the period of higher interest rates, are now re-entering the market, often mortgage-free or with substantial deposits. Buy-to-let activity has notably declined as smaller or ‘accidental’ landlords exit the market, influenced by less favorable financial conditions and increasing regulation.”
Eyeing Budget Clarity
U.K. home buyer demand remains strong, but price growth has moderated amidst increased buyer choice.
Rightmove analyst Tim Bannister commented on the subdued price growth, noting that buyers now have more options than since 2014. Sellers are urged to price competitively to attract buyers, especially in the face of stretched affordability. While market activity has not slowed, some buyers are reportedly waiting for budget clarity and anticipated lower mortgage rates later this year.
The average five-year fixed mortgage rate has risen slightly from 4.55% to 4.61% this week, but it remains significantly lower than the peak of 6.11% in July 2023.
Despite the potential impact of budget changes, Bannister maintains a positive outlook for the U.K. housing market in 2025. He anticipates a surge in market optimism once the budget details are announced, followed by interest rate cuts.
While affordability remains a significant challenge due to high mortgage rates, anticipated rate cuts could provide a much-needed boost to buyers.
The U.K. budget is scheduled for Oct. 30, and there are rumors that the government may end the stamp duty discount introduced by the previous administration. This change could increase homebuyers’ costs, particularly those purchasing properties above certain thresholds.
Bannister warns that this could lead to a rush to complete deals before the changes occur.
First-time buyers are already facing financial pressure from rising mortgage payments. The potential increase in stamp duty would further strain their finances, making it even more difficult to enter the housing market.
Where To Buy
The recent surge in house prices has made it increasingly difficult for many prospective buyers to enter the property market. However, new research from Zoopla highlights several affordable areas where buyers earning around £20,000 a year can still purchase a home.
Data reveals that Inverclyde in West Central Scotland is the most affordable location, with an average house price of £106,100. Based on borrowing 4.5 times their income, a buyer earning £20,040 annually could purchase a property here.
East Ayrshire follows closely, with average house prices of £106,800, requiring a salary of £20,160. West Dunbartonshire ranks third, where homes average £110,000, needing an income of £20,770.
In England, Hartlepool stands out for affordability. With an average house price of £114,100, it is accessible to those earning £21,550 per year. Other affordable areas include Blackpool and Burnley, with average prices of £123,600 and £120,100, respectively.
Scotland dominates the list of affordable regions, with half of the top 20 cheapest postcodes located there. The PA25 postcode in Cairndow, Argyllshire, boasts the lowest average price in 2023 at just under £55,000. Other affordable Scottish locations include Renfrewshire, Glasgow, and North Ayrshire, where property prices are below £130,000.
In England, Middlesbrough’s Berwick Hills (TS3) is the most affordable area, with an average asking price of £95,104. Meanwhile, Ferndale (CF43) is the most budget-friendly area in Wales, with average property prices at £118,990.
Other affordable locations include Kingston Upon Hull, North Ayrshire, and Sunderland, where annual salaries of £21,630 to £23,000 are sufficient to buy a home.
BoE’s Impact on Estate Market
Laura Suter, Director of Personal Finance at AJ Bell, anticipates a status quo from the Bank of England this week.
Despite the recent rate cut in August, the Bank of England is widely expected to maintain interest rates at 5% during this week’s meeting.
The central bank has been cautious about rapid rate reductions, signaling a preference for a gradual approach. While markets currently favor a hold, a small cut to 4.75% remains a possibility.
The upcoming inflation data could introduce some uncertainty into the Bank’s decision. A deviation from expectations could influence the monetary policy committee’s assessment.
With no meeting scheduled for October, the Bank avoids the potential conflict of making interest rate decisions immediately before the Budget. This allows time to analyze the government’s fiscal plans and inform subsequent policy decisions in November and December.
“Regardless, interest rates are expected to end the year at 4.5% – signaling two successive cuts before Christmas. That would be the best present that wannabe homeowners could get, with a mortgage rates war already hotting up. More interest rate cuts could put fire-starters under the housing market once again, which has already seen activity pick up since last month’s cut. Equally, a hold to interest rates this month might mean that some buyers decide to delay their house buying journey until later this year, in anticipation of lower interest rates,” Suter said.
Mortgages Hit a New Record
The number of mortgages approved for homebuyers surged to its highest level since the mini-budget was introduced under former Prime Minister Liz Truss.
According to the Bank of England, 62,000 mortgage approvals were recorded in July, the highest figure since 65,100 were reported in September 2022.
Mortgage rates spiked following the “growth plan” statement by then-Chancellor Kwasi Kwarteng in September 2022. However, in recent weeks, mortgage rates have been gradually declining, and earlier this month, the Bank of England lowered its base rate by 0.25 percentage points to 5%.
The Bank’s Money & Credit report showed increased house purchase approvals from 60,600 in June. In contrast, remortgaging approvals (which only account for loans with a different lender) dropped to 25,100 in July, down from 27,300 in June.
House Sales Increased
According to HM Revenue & Customs figures , the number of home sales in the U.K. in June was 8% higher than in the same month the previous year.
There were an estimated 91,370 transactions, an 8% increase from June 2023 but slightly lower—less than 1%—than in May 2024. HMRC noted that this slight month-on-month decline marks the first decrease since December 2023.
Iain McKenzie, chief executive of the Guild of Property Professionals, commented, “Transaction numbers have been steadily growing for some time now, and a month-on-month decrease is nothing but a fly in the ointment. The market still shows strength when compared to the previous year, with June’s figures 8% higher than the same time last year.”
He added, “It’s important to consider these figures in the broader context of the market’s recovery. The overall trend for 2024 remains positive, and higher transaction levels than last year suggest that buyer confidence is gradually returning to the market.”
What Is a House Price Crash?
A house price crash, often known as a housing market crash, can evoke anxiety among homeowners, potential buyers, and economists. Fundamentally, a house price crash represents a substantial and abrupt decline in the prices of residential real estate, particularly within the housing market.
It marks the point where the seemingly relentless increase in property values abruptly halts and takes a sharp, often painful turn downward.
During a house price crash, homeowners typically encounter challenging circumstances. The value of their most significant asset, their home, diminishes, making it difficult to sell or refinance. Those who purchased their homes at the market’s peak may find themselves in a state of negative equity, owing more on their mortgage than their home’s current value.
- When does a price crash happen?
For potential buyers, a house price crash can present a mixed picture. On one hand, it makes homes more affordable. However, it can also serve as an indicator of economic instability and the possibility of stricter lending standards, which can complicate the home-buying process.
In summary, a house price crash is a pivotal event within the real estate market, with far-reaching economic and social implications. It signifies a significant and sudden drop in home values, influenced by various factors. Understanding the causes and consequences of such a crash is vital for both current homeowners and those aspiring to enter the property market.
What Causes a Property Market To Crash?
The property market, often considered a pillar of stability in the economy, can sometimes experience dramatic downturns, leading to a property market crash. Such crashes can profoundly affect homeowners, investors, and the broader economy. But what are the factors that can cause a property market to crash?
Economic Downturns
One of the primary triggers of a property market crash is an economic recession. During economic downturns, people tend to have less money to spend, leading to declining demand for properties. As unemployment rises and consumer confidence wanes, homebuyers become scarce, and sellers may lower their prices to attract buyers.
- Prices increase over the years.
Interest Rate Hikes
Central banks control interest rates to manage inflation and economic growth. When interest rates rise, borrowing becomes more expensive. This can lead to reduced demand for homes, particularly in areas where mortgages are the primary means of home purchase. Higher interest rates can also put pressure on homeowners with adjustable-rate mortgages.
Speculative Bubbles
Property markets can experience speculative bubbles, where prices rise significantly above their intrinsic values. This can be fueled by speculative buying, often with the expectation of quick profits. When the bubble bursts, property prices can fall dramatically, leaving investors and speculators with significant losses.
Tightened Lending Standards
Financial institutions often tighten lending standards in response to economic conditions or regulatory changes. When lending standards become more stringent, it can be harder for buyers to secure mortgages, leading to a decline in demand and, subsequently, property prices.
Overbuilding
An excess of new construction projects can lead to an oversupply of properties. This can happen when developers overestimate demand or when market conditions suddenly shift. An oversupply can put downward pressure on property prices as sellers compete for a limited pool of buyers.
Natural Disasters and Local Factors
Local conditions, such as natural disasters or job market fluctuations, can impact property markets. For instance, an area prone to natural disasters like hurricanes or earthquakes may experience property market crashes due to property destruction and a decrease in demand.
Global Economic Crises
Major global economic crises, like the 2008 financial crisis, can substantially impact property markets. These crises can lead to widespread economic uncertainty, job losses, and a lack of confidence in the property market.
Mortgage Lending Set To Fall In 2024
Mortgage lending is anticipated to decline in the coming year, with an expected rise in arrears and repossessions, as outlined by U.K. Finance , a trade association for the U.K. banking and finance industry. Despite ongoing challenges in the mortgage market, U.K. Finance suggests that the primary affordability pressures are currently reaching their peak. ù
While the easing of financial strains may take time, improvement is projected in 2025. U.K. Finance predicts a decrease in lending for house purchases to £120 billion in 2024, down from £130 billion in 2023.
External remortgaging activity is expected to decrease to £60 billion from £65 billion, and the value of internal product transfers is forecasted to fall from £219 billion to £202 billion in 2024.
The report emphasizes that various factors are mitigating payment issues, ensuring that over 99% of the 10.8 million mortgages in the U.K. are currently not in arrears.
New Bank of England data , revealed on May 31, 2024, shows there were 61,100 mortgage approvals for house purchases in April, slightly down from March’s 61,300 and below forecasts of 61,500.
However, mortgage borrowing rose significantly last month, with £2.4 billion borrowed in April compared to £0.5 billion in March.
Mortgage approvals are an indicator of future borrowing.
The remortgaging market also cooled, with net approvals for remortgaging (with a different lender) decreasing to 29,900 from 33,500. This suggests higher mortgage rates deterred people from switching to new deals.
U.K. Homes for Sale Hit a Record High
Britain’s housing market has reached its highest supply of homes for sale in eight years, a trend that experts believe will curb house price increases for the rest of 2024.
According to Zoopla , a leading property website, the average estate agent now has 31 homes for sale—up 20% from the same period last year and the highest number since 2016. This surge in listings translates to approximately GBP 230 billion worth of homes on the market, as more sellers are re-entering the housing market in growing numbers.
Many homeowners postponed their moving decisions in the latter half of last year as higher borrowing costs impacted house prices and buyer demand, dampening confidence. Nearly one-third of the homes currently for sale were also listed in 2023 but failed to find buyers.
However, an anticipated drop in mortgage rates this year and rising sales volumes over the past six months have improved market sentiment. Experts predict that the Bank of England may cut interest rates in the coming months. This may follow a decrease in headline inflation to 2.3% from 12 months to April 2024.
The number of house sales agreed has increased by 13% compared to this time last year, though it still lags behind the supply level, providing buyers with a broader selection of properties. This trend may keep house price inflation in check. Zoopla’s latest index shows an annual house price deflation of 0.1%, indicating a slight price decline over the past year.
Despite a 0.4% increase in house prices over the last quarter, quarterly growth has slowed in the past month. Zoopla anticipates that house price inflation will remain flat for the year.
Can the U.K. Government Stop a House Price Crash?
The prospect of a house price crash in the U.K. raises concerns for homeowners and various industries that rely on a vibrant property market. According to Heather Powell, head of property and a partner at the tax and advisory firm Blick Rothenberg, government intervention is needed to prevent further price declines and safeguard the market.
Powell emphasizes the importance of implementing schemes to reinvigorate the property market:
“The continuing decline in residential property sales highlights the sluggish pace of recovery for industries tied to a healthy property market. The government must take action promptly to reenergize this essential aspect of the U.K. economy.”
She advocates for a regime that encourages first-time buyers without inflating property prices. She suggests that incentives like “Help to Buy,” tailored to regional price ceilings, could be beneficial. Such measures can unlock the capital generated by a thriving property market, contributing to the broader economic recovery.
What Is the Help To Buy Scheme?
The “Help to Buy” scheme, initiated in 2013 to aid aspiring homeowners, ceased accepting new applicants in October 2022 and is yet to be replaced by the government.
Powell also highlights the ripple effect of the property downturn, affecting industries beyond homeowners.
Estate agents, removal companies, decorators, carpet and furniture stores, and many other businesses dependent on the property market have witnessed declining sales in 2023. Their forecasts for the next six months remain bleak, raising concerns about the impact on tax revenues and government funds.
Property sales figures for the year ending July 31, 2023, show a significant drop compared to the preceding years. This situation affects households and impedes the overall recovery of the U.K. economy.
The issue extends to homeowners’ difficulty in selling their properties and starting anew due to limited demand. First-time buyers also struggle to accumulate sufficient deposits, leaving a void in the market.
In summary, the potential for a house price crash in the U.K. is a multifaceted challenge with broader economic implications. Government intervention and carefully designed schemes are crucial to address the issue. And also to protect both homeowners and the industries connected to the property market.
When Will U.K. Interest Rates Stop Rising?
The Bank of England‘s recent moves on interest rates have been closely monitored. Forecasts suggest a significant reduction in the base rate to approximately 3% by late 2025. This would mark a substantial decline from the current 5.25%. But it still represents a rise-and-fall pattern of interest rates.
Since December 2021, the Bank of England has consistently increased the base rate over 14 consecutive adjustments. Market expectations regarding where the base rate will ultimately peak have been ever-shifting. Incoming economic data and factors such as inflation, wage growth, and unemployment will influence them.
- BoE interest rates increased after the pandemic.
Market sentiment suggests that the base rate may have peaked at 5.25%. However, Paul Dales, Chief U.K. Economist at Capital Economics, presents three reasons for cautious optimism.
First, anticipated Ofgem utility price cap reductions and other positive factors could push CPI inflation down to about 4.6% in October. Second, the service CPI inflation rebound is considered temporary. Third, slowing average earnings growth suggests wage growth, a key domestic price pressure indicator, may have peaked.
Nevertheless, Dales cautions that the U.K.’s inflation issue is unlikely to resolve swiftly. The labor market’s relaxation has gradually, and high inflation expectations persist. Consequently, the decrease in core inflation and wage growth may be gradual rather than sudden.
While it is doubtful that the Bank of England will further increase interest rates, it might not be able to reduce them until late 2024.
Would a Stamp Duty Cut Keep Property Prices Rising?
The property market, especially in the United Kingdom, has been a subject of intense interest and debate in recent years. The interplay of various factors, including demand, supply, and government policies, greatly influences property prices. One such policy that has been considered a powerful lever in influencing property market dynamics is the stamp duty.
Stamp duty is a variable tax on U.K. property purchases. Governments have occasionally introduced temporary reductions or exemptions in response to economic challenges or to boost the property market. The question that often arises is whether such cuts can effectively keep property prices upward.
To understand this, it’s essential to consider the dynamics at play:
Demand and Affordability
Reducing or exempting stamp duty can make properties more affordable, particularly for first-time buyers and those looking to move up the property ladder. This can increase demand, putting upward pressure on prices, especially in the lower to middle segments of the market.
Market Sentiment
Positive news of a stamp duty cut can boost market sentiment, increasing buyer confidence. This sentiment can translate into a flurry of property transactions, further stimulating price growth.
Regional Variances
Property markets in the U.K. vary by region, and the impact of a stamp duty cut can differ significantly. In regions where affordability is a key issue, a cut can be more influential in driving up prices.
Short-Term vs. Long-Term Effects
Stamp duty cuts often have a more pronounced effect in the short term, creating a transaction surge. Whether this leads to a sustained increase in property prices in the long term depends on various factors, including economic stability, job growth, and housing supply.
Fiscal Policy
Stamp duty cuts’ effectiveness in sustaining price growth depends on broader fiscal policies and economic conditions. An isolated tax cut may not be enough to counteract the impact of a broader economic downturn.
It’s worth noting that while a stamp duty cut can influence property prices, it is not a standalone solution. Property markets are multifaceted, and various internal and external factors influence their trajectories. Additionally, stamp duty cuts can have implications for government revenues, which may affect funding for public services.
A stamp duty cut can certainly provide a short-term boost to property prices and market activity, particularly in regions where affordability is a concern. However, its ability to keep property prices rising over the long term depends on a complex interplay of factors.
Sustainable price growth typically requires a supportive economic environment, adequate housing supply, and measures to address broader affordability issues.
Analysts’ View
Sarah Coles, Senior Personal Finance Analyst at Hargreaves Lansdown, highlighted the potential risks of stimulating housing market demand through stamp duty cuts.
Coles points out that such incentives could drive up house prices. This may happen especially in a market already grappling with tight housing supply and increasing mortgage payments due to rising interest rates. She parallels past experiences, where stamp duty holidays effectively boosted demand, potentially leading to price increases.
Coles highlights that tax cuts, though generally favored by buyers, won’t solve the current property market challenges.
A comprehensive approach is necessary to address these issues effectively. Simply boosting demand without addressing supply constraints may lead to more buyers vying for limited housing stock, potentially driving prices up. This phenomenon occurred during the stamp duty holiday prompted by the COVID-19 pandemic.
Richard Fearon, Chief Executive of Leeds Building Society, echoed the concern about the consequences of using tax cuts to boost demand. He suggests that a more sustainable solution lies in investing in building an adequate supply of houses rather than relying on widespread stamp duty reductions.
Fearon argues that such tax-driven strategies may inflate house prices, exacerbating first-time buyers’ challenges.
He pointed out that governments have historically favored quick-fix demand-boosting measures over addressing the structural issues within the housing market. The focus should be on ensuring a balanced supply of properties to achieve more lasting and equitable growth.
In summary, the experts raised concerns about the potential pitfalls of demand-stimulating measures like stamp duty cuts. They stress the need for a comprehensive approach that addresses both supply and demand issues within the property market to promote sustainable growth.
Where Will There Be a U.K. House Price Crash?
This year, house prices declined, initially hitting the South of England. But now, higher interest rates are affecting other regions too. In the current landscape, house prices are experiencing declines in all areas of England.
The East of England and the South East have witnessed the most significant price falls over the past year, registering -2.4% and -2.2%, respectively. North East Yorkshire and the Humber are marginally experiencing negative growth at -0.1%.
- How will U.K. house prices perform?
In a notable shift, house prices in Wales have recorded an annual decrease of 0.2% for the first time. They increased by 0.1% just in the previous month. In Cardiff, house prices have seen a year-on-year decline of 0.2%, matching the rate observed in the preceding month.
Among major U.K. cities, Bournemouth, Cambridge, and Southampton have experienced the most substantial house price drops, with declines of -2.6%, -2.3%, and -2.0%, respectively.
FAQs
Will UK house prices fall in 2024?
By the end of 2023, house prices are expected to have fallen by 5% over the course of the year, with a further anticipated decrease of 2.4% in 2024, according to a Lloyds Banking forecast. These projections suggest a total 11% decline in property prices from their peak in the previous year. Santander, another major financial institution, is predicting a larger drop in UK house prices for the entirety of 2023, estimating a decline of approximately 7%, followed by a more modest 2% fall in 2024.
When was the last property price crash?
The last UK property price crash was during the Great Financial Crisis in 2008-2009, when the average prices in the UK fell by 15.6% between February 2008 and February 2009.
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