Inflation unexpectedly dipped from 2.6% to 2.5% in the year to December, a slight but welcome decrease. The latest figures from the Office for National Statistics (ONS) offer some relief to Chancellor Rachel Reeves, who recently faced criticism over the falling value of the pound and rising government borrowing costs.
Although inflation remains just above the government’s 2% target, it’s significantly lower than its October 2022 peak of 11.1%, when consumer prices soared. This steady decline raises questions about its impact on the UK housing market.
Inflation and the UK Housing Market
Inflation influences buyer and seller behavior, affecting confidence, affordability, and mortgage rates. The latter is closely tied to decisions made by the Bank of England’s Monetary Policy Committee (MPC), which held interest rates at 4.75% last month. While there had been hopes of a rate cut, the next MPC meeting in February will determine the course forward. Michael Saunders, a former MPC member, suggested the lower inflation figure offers “some help” in alleviating concerns about interest rates.
UK Housing Market Resilience
The UK housing market has shown remarkable resilience through 2024 and into the new year. House prices are on an upward trajectory, with transaction volumes also recovering from 2023 levels. Despite inflation remaining slightly above target, strong demand for property is expected to sustain this momentum.
The latest ONS house price index reveals that property prices increased by 3.3% in the year to October 2024. This index, based on Land Registry sold prices, typically lags behind other measures using asking prices or mortgage data.
The most significant annual price increases were recorded in the North East (5.9%), North West (5.7%), and Yorkshire and the Humber (5.7%). Meanwhile, London saw a marginal decline of -0.1%, and the South East reported a modest 1.4% gain.
Darrell Walker, director of sales and distribution at ModaMortgages, described the 3.3% price rise as “a clear sign of the housing market’s resilience despite economic and political challenges.” He highlighted the adaptability of investors and landlords, many of whom remain active in pursuing new opportunities. Walker predicts continued growth in 2025, buoyed by the anticipated easing of borrowing costs and further impacts of the Autumn Budget.
A Look Ahead: 2025 Outlook
Walker noted that house prices could grow by as much as 4% in 2025, with economists and agents forecasting increased market activity if borrowing costs ease. He emphasized the importance of speed and simplicity for landlords looking to capitalize on expected growth in the property market.
Inflation, Interest Rates, and Mortgages
While inflation is falling, it remains above the government’s target, creating uncertainty around the Bank of England’s upcoming interest rate decision. Analysts predict either a small rate cut or a continuation at the current 4.75%. Market pressures are mounting for the Bank to reduce rates, but hesitancy could hinder momentum.
Paresh Raja, CEO of Market Financial Solutions, urged the industry to move beyond a “wait and see” approach. He argued that focusing solely on rate cuts creates unnecessary hesitation and called for lenders to adapt their offerings to meet borrower needs.
“The market has weathered tougher conditions in recent years, and the early months of 2025 have already shown positive growth in house prices and buyer demand,” Raja said. He stressed the importance of tailored support for brokers and borrowers to sustain optimism and activity in the months ahead.
Conclusion
The UK housing market’s resilience, combined with lower inflation, provides a cautiously optimistic outlook for 2025. While uncertainty remains around interest rates, continued adaptability by lenders and investors is crucial to building on the current momentum.
