House prices have increased by 1.5% over the past year, according to the latest data from Zoopla. This marks a return to growth, following a 1.2% drop in 2023, when buyers faced difficulties adjusting to fluctuating mortgage rates.
Despite the recent rise, the growth is still modest compared to the 7.2% recorded in 2022. This shows a marked slowdown, with the market reacting to the impact of interest rate changes and economic uncertainty.
Zoopla suggests that the housing market may have turned a corner. It believes that buyers have now adjusted to higher borrowing costs, and the market is on a more stable path. As a result, the property website predicts further price increases in 2025.
Mortgage rates have stabilised to some extent, with many buyers this year able to secure rates between 4% and 5%. This relative stability has helped boost buyer confidence.
Additionally, a rise in household incomes has contributed to some buyers being able to stretch their budgets further, supporting the growth in property prices despite the ongoing challenges in the market.
According to data from the Office for National Statistics, the average household income for both first-time buyers and existing homeowners has seen a significant increase over the past two years, with figures rising by between 9 and 12 per cent. This increase in household income is providing much-needed financial relief for many buyers, particularly as they navigate the challenges of the housing market, including higher mortgage rates and property prices. This growth in income has enabled buyers to stretch their budgets further, making it easier for them to secure properties, despite the higher borrowing costs.
Zoopla’s latest report suggests that 2024 is likely to see the housing market finish strongly, as motivated buyers seek to lock in sales before the return of higher stamp duty rates in April 2025. Currently, home movers are only required to pay stamp duty on properties worth more than £250,000. However, from March 2025, the threshold for stamp duty will revert to £125,000, the level it was set at before the temporary changes introduced in the 2022 mini-Budget. This reduction will mean that many buyers will face higher tax bills on their property purchases.
For first-time buyers, the situation is also set to change. At present, first-time buyers purchasing a property valued up to £425,000 are exempt from paying stamp duty. However, from 1 April 2025, this limit will drop to £300,000. As a result, a first-time buyer purchasing a property for £425,000 will face a stamp duty bill of £6,205, a significant change that could impact the affordability of homes for many.
Given these upcoming changes, Zoopla reports a noticeable surge in activity within the housing market. Sales agreed are currently 19 per cent higher than they were at this time last year, with buyer enquiries up by 25 per cent. This increase in demand indicates that many buyers are keen to finalise their property deals before the higher stamp duty rates take effect. It also highlights a growing sense of urgency among those who want to take advantage of the current exemptions and avoid the increased costs that will come with the stamp duty changes.
Northern towns see biggest house price rises
House prices have risen across every region in the UK, although the increase is not uniform, with a noticeable north-south divide still present.
Northern Ireland has recorded the most significant price gains, with house prices up by 6.3 per cent compared to the same time last year. The North West of England has also seen positive growth, with prices rising by 2.9 per cent during the past year. These regions have benefited from increased demand and relatively more affordable property prices, which have helped fuel this upward movement.
However, in southern England, the picture is less positive, with affordability pressures continuing to suppress price growth. In many areas, house prices have increased by just 1 per cent or less. These affordability challenges are particularly pronounced in regions such as the South East and the South West, where rising living costs and higher mortgage rates have created hurdles for potential buyers.
At a more local level, some areas are experiencing larger price increases, particularly in towns around Manchester. For instance, the average property in Oldham has risen by 3.7 per cent year-on-year, while in Wigan, the average home has increased by 3.9 per cent. These towns have benefitted from growing demand, partly driven by the search for more affordable housing options compared to central Manchester.
On the flip side, some areas in southern England have seen modest price falls. Ipswich has recorded a decrease of 1.1 per cent, while Truro and Dartford have seen a slight decline of 1.2 per cent each. These areas are likely feeling the impact of higher housing costs, with affordability issues leading to slower price growth or even slight declines in certain local markets.
What will happen to house prices in 2025?
Property experts at Zoopla are predicting a 2.5 per cent annual increase in the average property price for 2025. This forecast suggests that the housing market will continue to see modest growth, driven by stabilising factors such as more predictable mortgage rates and steady buyer demand.
According to the Office for Budget Responsibility (OBR), incomes are expected to grow more modestly after 2025, which may affect overall affordability in the housing market. Zoopla also predicts that mortgage rates are unlikely to see significant changes over the next 12 months. The typical mortgage rate for an average home buyer is expected to remain around 4.25 per cent throughout 2025.
Alongside the interest rate, Zoopla highlights that lenders will continue to stress-test new borrowers to ensure they can still afford their mortgage payments if rates were to rise. This stress test is based on a calculation that typically includes the lender’s standard variable rate plus an additional percentage to simulate a potential rate increase.
At present, some lenders are testing the affordability of borrowers as though they could be facing mortgage rates of around 8 per cent. This is a precautionary measure to ensure that borrowers will not be overwhelmed by future rate hikes.
In the event of future interest rate cuts by the Bank of England, Zoopla suggests that mortgage lenders will likely relax their affordability checks. These changes could ease some of the pressure on borrowers, making it slightly easier to secure mortgage approval as the financial landscape becomes less restrictive.
Are homes overvalued?
Ultimately, the key factor influencing the outlook for house prices is whether current prices appear cheap or expensive. The more affordable properties seem, the more likely they are to rise in value. On the other hand, if homes appear expensive, the chances of house prices increasing are reduced.
Zoopla has developed a model to track whether homes are under or overvalued. In 2007, just before the global financial crisis, house prices were over 40 per cent overvalued, which led to a sharp decline in house prices during 2008/9. Fast forward to the recent surge in mortgage rates between 2022 and 2023, and UK homes became 16 per cent overvalued, according to Zoopla’s calculations.
However, Zoopla noted that lower mortgage rates throughout 2024 have helped to repair this overvaluation without the need for significant house price falls. Looking ahead, its property experts predict that house prices will remain undervalued in 2025, assuming an average mortgage rate of 4.25 per cent, house prices rising by 2.5 per cent, and income growth of 4.6 per cent.
Over the next three years, Zoopla expects house prices to grow by 7.5 per cent. But the market is far from simple, as the affordability divide between the north and south of the UK plays a key role. Currently, house prices in the Midlands, Northern England, Scotland, and Wales are considered fairly valued by Zoopla’s metrics, which is why prices are rising at an above-average rate in these areas.
In contrast, house prices in southern regions appear overvalued by 30 per cent or more. As a result, Zoopla anticipates that house price growth in southern England will lag behind the UK average in 2025 and into 2026. The company also points out that in these southern regions, incomes need to grow faster than prices to improve affordability further.
Richard Donnell, executive director at Zoopla, commented on the market’s resilience, noting, “The housing market has been resilient in the face of higher borrowing costs over the last two years. Higher income growth and lower mortgage rates have helped reset housing affordability faster than many expected over 2024.” He expects the trend of increased sales and house prices to continue into 2025.
Simon Gerrard, managing director of Martyn Gerrard Estate Agents, also sees a dynamic year ahead for the property market. He anticipates a “fast-paced and exciting year,” particularly for first-time buyers. Many will be keen to secure properties before the stamp duty increase set to take effect in April 2025. This tax change, which was introduced in Labour’s Autumn Budget, will impact first-time buyers, particularly in London, making it imperative for them to act before the new rates apply.
Looking further into 2025, Gerrard predicts that as interest rates gradually decrease, more people who have delayed their property searches will return to the market. This could result in increased enquiries and purchases across all levels of the property market. He concludes, “Overall, the turbulence of 2024 looks set to give way to a fast-paced and exciting year for the property market in 2025.”
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