The week ahead: House prices should recover but risks abound

All the same factors driving the economic recovery next year will also support the recovery in the housing market. We expect house prices to grow by about 4% next year. But threats to interest rates and income growth mean the risks are weighted towards slower growth. 

House prices jumped by 1.2% in November according to Nationwide, that took the annual growth rate to 3.7%, the fastest rate in two years. This was probably driven by a combination of the interest rate cut and a bit of post-budget relief. Mortgage approvals also jumped indicating robust demand for housing over the next few months. 

Admittedly, the Autumn Budget has made the outlook for house prices a bit less optimistic than before. Interest rates will now fall more slowly, mortgage rates have actually increased since the Autumn Budget with the two-year swap rate rising above 4% from 3.7% in mid-September, and income growth will be slower, especially from 2026, which will damage price-to-income ratios. What’s more, some people will bring purchases forward ahead of an increase in property taxes in April, which could lead to a bumpy profile in the first half of next year. 

However, borrowing costs will gradually come down over the next year. We expect one 25 basis points rate cut per quarter in 2025, which leave the Bank rate at 3.75%. That will support house prices as mortgage rates follow the Bank’s lower rate. In addition, wages should rise by a little over 4% in 2025, allowing stronger house price growth without reducing affordability. Finally, the house price to income ratio has dropped to about 7.3, the lowest level since 2014, meaning there is plenty of scope for house prices to rebound. After probable growth of about 4% by the end of 2024, we’re expecting similar growth next year. 

The risks, though, are weighted to lower house price growth. The first is that the Bank of England is only going to cut interest rates gradually. We have written about the risks to the outlook in our latest Quarterly Economic Outlook, but higher energy prices, businesses response to the Autumn Budget or economic policies in the US could result in higher interest rates in the UK, and slower house price growth. Similarly, higher inflation or slower wage growth would reduce how much house prices could grow without impacting affordability. One theoretical risk to prices is a surge in supply of new houses if the government target of 1.5m new homes this parliament is reached, but in reality this seems so unlikely that we are not factoring in downward pressure on prices from new supply. 

The upshot is that we expect robust house price growth and transactions next year, but much like the overall economic view, there are plenty of risks that could derail that relatively positive outlook. 

UK GDP to rebound 

October’s GDP print will probably show the UK economy saw a return to modest growth at the start of the fourth quarter. 

The economy suffered a sharp loss of momentum in the second half of 2024 GDP. Output expanded by just 0.1% in Q3 24, down from an average quarterly pace of 0.6% in the first six months of the year.

Output fell in September, though the drop was part due to a large fall in IT and communication services, which we think is likely to reverse in October. Part of the weakness in the production sector is also likely to unwind. We see downside risks to our view driven by uncertainty surrounding the Autumn Budget - the lack of clarity on which taxes could rise may have prompted some firms to adopt a ‘wait-and-see’ approach.

Our baseline forecast sees the economy expand by 0.3% in Q4 24. Despite the weakness of headline GDP growth in Q3 24, private demand showed signs of strength. Government consumption is also likely to have played an increasing role in supporting growth at the end of 2024 and will continue to do so in the first half of 2025.

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