Real Estate in 2025: A Shift Towards a Buyer’s Market?

As 2024 comes to a close, the property market is experiencing a surge, but what does this mean for house prices in the coming year?

This year, homebuyers and sellers encountered several hurdles, with high mortgage rates initially suppressing demand. However, recent months have seen a boost in market confidence due to slowing inflation and interest rate cuts.

According to data from Nationwide and Halifax, house price growth has reached its highest point in two years, with average values exceeding their pre-pandemic levels.

Despite mortgage rates being higher than in previous years, they have been on a decline.

Robert Gardner, chief economist for Nationwide, commented: “The resilience of the mortgage market and house prices in 2024 was surprising, given the ongoing affordability challenges for potential buyers.

“It was encouraging to see increased activity in the housing market throughout the year. By the end of 2024, the number of mortgages approved for house purchases each month surpassed pre-pandemic levels.

“Similarly, after starting the year with slight annual declines, house price growth picked up significantly, nearing 4% in November.”

Many lenders and estate agents expect this confidence to continue into 2025, especially if interest rates and mortgage prices drop further.

However, the market still faces some challenges.

The Autumn Budget introduced tax changes, such as hikes in capital gains tax and an increase in the additional rate of stamp duty from 3% to 5%, which could impact purchasing decisions.

Moreover, stamp duty thresholds are scheduled to decrease in April 2025, adding to the cost of buying property.

The outlook for the property market in 2025

In 2025, homebuyers will not only be concerned about high mortgage rates or inflation.

Analysts believe that early in the year, there will be a rush to complete purchases before changes to stamp duty thresholds take effect.

First-time buyer stamp duty relief is set to decrease from £425,000 to £300,000 starting in April 2025, while home movers will begin paying the tax from £125,000 instead of £250,000.

Gardner noted: “The upcoming stamp duty changes will likely cause volatility, as buyers accelerate their purchases to avoid additional taxes.

“This will result in a spike in transactions during the first three months of 2025, especially in March, followed by a period of reduced activity over the next three to six months, similar to previous stamp duty changes. This will make it challenging to assess the underlying market strength.”

While stamp duty poses a challenge, some sellers may need to lower prices if buyers miss the deadline. However, political stability could benefit the market.

Nick Leeming, chairman of Jackson-Stops, stated: “With a more stable political landscape and the effects of the October Budget diminishing, we anticipate a more balanced market in 2025.

“This stability will benefit both buyers and sellers, creating an environment where transactions can proceed with greater confidence and predictability. We expect this will encourage more people to enter the market, whether they are first-time buyers or those looking to move up the property ladder.”

The estate agency brand predicts that upsizing families and downsizing retirees will drive the market in 2025.

Will house prices rise or fall in 2025?

House prices might rise due to increased demand before the stamp duty deadline, but this could be offset by a slowdown in activity after April.

Gardner said: “If the economy continues to recover steadily, as we expect, the underlying pace of housing market activity will likely strengthen gradually as affordability constraints ease due to modestly lower interest rates and earnings outpacing house price growth, which is expected to remain between 2-4% in 2025.”

Homeowners may also feel more optimistic about listing their homes, and Rightmove predicts that new seller asking prices could rise by an additional 4% overall in 2025, driven by expected mortgage rate declines that would stimulate activity.

However, Knight Frank warns that tax changes in the Budget are complicating market predictions, especially as mortgage rates have slightly risen and expectations for interest rate cuts have slowed.

Due to this challenging rate environment, Knight Frank now forecasts average UK house price growth of 2.5% in 2025, 3% in 2026, and 3.5% in 2027, down from its previous estimates of 3%, 4%, and 5%, respectively.

Meanwhile, Savills predicts that the prime markets, where investors are most affected by extra stamp duty charges and changes to non-dom rules, will experience the greatest challenges.

They expect prime London house prices to decrease by 4% in 2025, compared to a forecasted 4% increase in the mainstream UK market.

Lucian Cook, head of residential research at Savills, explained: “In a typical housing market recovery, you would expect the top end to rebound first, responding quickly to changing sentiment.

“However, the additional stamp duty surcharge for second homes, changes in ‘non-doms’ taxation, and VAT on school fees are likely to counteract some of the benefits from future interest rate cuts this time around.”