Will UK House Prices Rise in 2025? An Economic Perspective by Handelsbanken

Economic Perspective by Handelsbanken: The Role of Wealth and Supply Challenges

Wealth levels in society play a foundational role in house price trends. As individuals grow wealthier, they tend to invest more in housing, enhancing demand for higher-quality homes. However, this long-term trend is overshadowed by the UK’s ongoing supply issue. Despite a population comparable to France, the UK has just 30 million homes compared to France’s 37 million. Successive governments have identified this as a priority, but tangible progress remains limited.

Affordability: A Double-Edged Sword

Affordability, driven by earnings and interest rates, is a critical determinant of immediate house price movements. Following a dip in real earnings caused by the inflation spike of 2022, wage growth has rebounded somewhat. However, predictions indicate real earnings growth could slip back into negative territory by 2025 due to fiscal tightening measures introduced in the October Budget.

Interest rates, meanwhile, are a beacon of optimism for housing affordability. With inflation significantly reduced from its peak, the Bank of England is expected to lower rates over the next year, possibly settling around 3.75%. This decline would ease financing costs, boosting buyer confidence.

Investment Yields and Property Valuation

For property investors, achieving a premium yield over government bonds is essential. Historically, residential property has offered a 4% yield, but this was compressed as gilt yields surged during the inflationary spikes of 2022. In response, rents have risen by 7% since summer 2021, and property values have dropped by 15% in real terms.

Despite these adjustments, further recalibration is likely before yields reach levels that fully compensate for investment risks. Consequently, house prices are expected to rise at a rate below inflation for the next two years.

Upcoming Challenges in 2025

Two significant headwinds are expected to temper the housing market in 2025. First, the planned increase in stamp duty in April could distort market activity. While this may spur a short-term surge in transactions as buyers rush to avoid higher costs, it is unlikely to signal a sustained recovery. In the longer term, increased transaction costs could dampen market participation.

Secondly, the broader economic environment, characterised by moderate growth and restrained confidence among businesses and consumers, is likely to weigh on house prices. Handelsbanken forecasts steady but unspectacular growth for the UK economy over the next 12–18 months, a trend likely to be mirrored in the housing market.

Handelsbanken’s Unique Approach

Against this backdrop of economic moderation, Handelsbanken’s commitment to building long-term customer relationships provides a refreshing perspective on mortgage lending. Founded in Sweden in 1871, Handelsbanken has grown to become one of the world’s strongest banks, with over 850 branches in 25 countries. Its decentralised model allows each branch to operate as a small business, making decisions locally to deliver tailored solutions.

Jake, a Handelsbanken Branch Manager (Hampstead branch), encapsulates the bank’s ethos:

“We’re passionate about building long-term relationships, getting to know our customers, and helping to make a real difference to them, their businesses, and families.”

With this bespoke service model, Handelsbanken supports customers through the complexities of the housing market, offering personalised advice and financial solutions that align with their individual needs.

Conclusion

While the UK housing market in 2025 will likely experience subdued growth amid affordability challenges and economic headwinds, it remains underpinned by structural demand and long-term wealth trends. Handelsbanken’s relationship-driven approach to banking ensures that individuals and businesses are well-equipped to navigate these complexities, making informed decisions in an evolving market.

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