Will falling Rates, High Wages, and Supply Crunch ignite the housing market in 2025?

Today, Zoopla published its house price index, showing that the supply of homes on the market is 20% up compared to last year and the highest at any point in the last eight years, with the average estate agent handling 31 homes for sale. Richard Donnell, Executive Director at Zoopla, said, "the growth in the supply of homes for sale is evidence of renewed confidence amongst homeowners, some of whom delayed moving decisions in 2023. The quarterly rate of house price inflation has picked up in recent months as more sales are agreed and prices firm,"

The house price index also highlighted that agreed sales were up 13% compared to last year. So, why has there been renewed confidence among homeowners?

It's partly down to falling interest rates:

The average two-year and five-year fixed rates peaked at 6.65% and 6.51%, respectively, following the mini-budget in September 2022. Mortgage rates in Q1 of 2024 have been steadily falling, in part because of the fall in inflation and markets pricing in interest rate cuts from the Bank of England this summer. 

Today's average two-year fixed rate and five-year fixed rate are well below the peak at 5.20% for a two-year fixed and 4,76% for a five-year fixed. There was also good news on inflation this month, where it fell to 2.3%, prompting markets to predict that the Bank will start cutting rates this summer. Interest rates are forecast to be at 4.50% by the end of this year and 3.50% by the end of 2025.

Wages have outpaced house price growth in the last two years:

According to the Office for National Statistics, house prices fell by an average of 1.4% last year, while average weekly earnings grew by 6.2%. Wage growth this year is also likely to outpace house price growth, and falling interest rates will likely improve affordability for first-time buyers in the coming year.

According to Halifax, a typical UK home is now 6.7 times earnings compared to 7.3 in the summer of 2022. At a national level, the typical first-time buyer property price is 5.4 times average earnings, down from 5.8 in 2022. As the graph below also highlights, the house price-to-earnings ratio has been steadily falling in the last two years, and further rate cuts and strong wage growth will likely further drive down this ratio, making homes more affordable. But there is an issue.

Source: Halifax

Supply Crunch:

The supply crunch shows no signs of easing anytime soon. Even with a new Labour government, experts think the supply and demand gap will only worsen. The supply of affordable homes will lag for the next two to three years.

Major builders are scaling back. Earlier this year, housebuilders cut their targets. Persimmon is optimistic about 2024, and Taylor Wimpey saw better sales, but neither raised their building goals.

With people's affordability increasing and the supply of new homes falling, upward pressure on house prices will likely rise. Experts predict that after a 1.8% bump in house prices this year, a 3.1% increase next year and another 4.0% jump in 2026.

The housing market has shifted significantly from the pandemic boom, during which home prices surged by 25% between February 2020 and September 2022. This surge was driven by buyers seeking more space and taking advantage of ultra-low interest rates. However, with affordability improving, potential interest rate cuts looming, and a shortage of new home construction, the market may be poised for a rebound in the coming year.