Need help reading this page? Click to activate Recite Me popup.

 

 

What can we expect from the UK housing market in 2025?

 

"Deposit raising and affordability remains difficult, to the point that we could probably call it the collapse of youth home ownership."

Andrew Asaam
Homes Director, Lloyds Banking Group
Published on: 22 January 2025
6 min read

2024 was a year of change around the world. A new government came into power in the UK, while numerous international elections and conflicts caused geopolitical uncertainty. We’re entering this new year against a very different political and economic landscape. But what do these changes mean for the property market in 2025, and how will they impact housing supply, affordability, and mortgage rates this year? 

 

What's the economic backdrop to the housing market? 

The rise in inflation and interest rates which led to the cost-of-living crisis in 2023 are still having repercussions. While inflation has slowed, prices haven’t fallen. House prices, interest rates and mortgage rates have fluctuated, and many potential buyers, especially younger buyers, are finding it increasingly difficult to access the market. However, inflation also means that wages have grown, which means most people are still able to meet the increased cost of mortgages. 

The domestic outlook for the UK economy remains relatively benign. Even though economic growth has recently been slow, and its absence is a challenge, unemployment remains low by historic standards and inflation has fallen back towards the Bank of England’s target. The rate is likely to remain a little above 2% over the course of 2025, but this slowing in the pace of inflation has been sufficient to allow the Bank of England to begin to reduce the Base Rate from its peak.  

External geopolitical risks continue to be a factor, not least around the shape of economic policies adopted by the US and the responses by the UK, EU and China. Even in the absence of major surprises, global financial markets have recently looked ahead to likely shape of future US economic policy and have accordingly repriced US borrowing costs, with knock-on effects for borrowing costs in the UK.  

"A rate of around 4% is what homeowners should expect as the new normal."

What will happen to mortgages and interest rates in 2025? 

The recent upward pressure on global market interest rates is likely to push UK mortgage rates upwards, even against a backdrop of further interest rate cuts by the Bank of England. Mortgage rates are likely to range between 4% and 5% in 2025. We can’t expect them to drop back to the historical lows that we used to have of around 1% - the economic drivers of those low interest rates are gone. And so, a rate of around 4% is what homeowners should expect as the new normal, as the current market volatility subsides, and wages continue to grow.  

In terms of the mortgage market, a big feature of the second half of 2025 will be the maturing mortgages of those who purchased homes during the pandemic. People who bought during the ‘race for space’ in 2020, and make up a significant part of the market, are likely to be coming to the end of their fixed term mortgage. We expect this remortgaging cycle to last for around 12 months – so until the latter end of 2025 going into 2026. 

 

What does the housing market look like for first time buyers in 2025? 

The shape of the housing market has shifted dramatically over the past few decades. When we talk about first time buyers now, we’re really referring to a different demographic than that of 25 years ago, when the average age of a first time buyer was 29. Today, it’s risen to 34. 

Additionally, the stamp duty holiday for First time buyers is due to finish at the end of March this year. This means that the current 0%-rate threshold for first time buyers will reduce from £425,000 down to £300,000. We can assume that there will be an influx of customers trying to push through completion by the end of March.

 

Who are the first-time buyers now? 

We’ll continue to see support from BOMAD (the ‘Bank of Mum and Dad’) in the form of deposits for around 40% of first-time buyer purchases in 2025. The average gift being given by family members is c.£25,000 – a trend that is more concentrated in London and the Southeast, where property prices are higher. This boost to deposits means that those first-time buyers can benefit from either lower monthly mortgage repayments or from being able to buy a home sooner. 

More affluent first-time buyers with parental support will continue to constitute a significant proportion of the first-time buyer population, while home ownership for younger adults outside of this demographic will remain challenging. According to the 2021 census, 4 million adults now live with parents – an increase of nearly 15% compared to 2011.  

Deposit raising and affordability remains difficult, to the point that we could probably call it the collapse of youth home ownership. And really, there’s nothing that suggests the market is going to get easier for this demographic in 2025. 

Where does this leave young people today? The scale of the financial challenge that young adults face is evident when we scrutinise real data on their earnings and savings. Only a small minority (8%) of those aged 25-to-34 who are not homeowners have sufficient savings to afford a 10% deposit on the average first-time buyer home in their region; indeed, half (48%) of non-home owning young family units have less than £1,000 in the bank. 

 

Giving first-time buyers a boost

29 August 2024 | Amanda Bryden

We’re launching new support to get more first-time buyers onto the property ladder.

Read Amanda's article Read Amanda's article about support for first-time buyers (opens in same tab)

Why is it so hard for first time buyers right now? 

Though unemployment remains relatively low, house prices have continued to outstrip real wage growth since the financial crisis in 2008. As a result, deposit raising and affordability continue to be significant barriers for younger people wanting to get onto the property ladder.  

The chances of a young single person being a homeowner today is lower than for couples (11% compared with 52%), and these relative odds have grown over time. In 1989, young couples were around three times as likely to be homeowners than singles; this increased to almost five times by 2019, as dual earner couples have become the norm. 

Back in 2000 the average UK property price was £80,000, with an average deposit of £8,000. Now the average house price has risen to £290,000 and with an average deposit of £53,000. Whilst average UK salaries have increased from £20,000 in 2000 to £35,000 today, this has not been enough to keep pace with increases to housing costs.  

When adjusted for inflation, the purchasing power of today’s buyers is not what it once was, with monthly mortgage payments on home buying purchases at the highest share of income for 15 years. 67% of 25-34-year-olds who cannot buy a home today cite the cost of a deposit as a barrier, while 41% report they are unable to service a mortgage. 

All this means that not only are houses more expensive, but it’s also taking longer for young people to be able to save up for a first deposit. Rising rents and living costs also impact how much income would-be first time buyers can put towards a deposit. 

One of the main causes of all this, though, is the lack of available homes for young adults - and this includes those who are renting. Really, there’s nothing that suggests the market is going to get easier for this demographic in 2025.

 

How can we help younger adults to get onto the property market? 

The first thing that needs to be done to help get more young adults onto the property market is to address the UK’s housing shortage. And though the proposed reforms to the planning system will be helpful to support new housing delivery, it will take time for the effects of that to come through.  

In addition, we need to address the pressing issue of the lack of skilled workers who can deliver the homes that we desperately need.  

However, even as they face into these challenges, there are options available such as our First Time Buyer Boost and Lend a Hand schemes. We’re also working to deliver increased education and guidance through our customer channels.

We recognise there are always things we can do to further support First Time Buyers understand the home buying process, as well as things to think about when preparing to buy their first home. We’re also a supporter of Shared Ownership as a route to getting onto the property ladder. Our efforts continue to focus on innovating in this space to offer additional help to these customers.    

“Deposit raising and affordability continue to be significant barriers for younger people wanting to get onto the property ladder.”

What will happen to housing supply and availability in 2025? 

The underpinning issue of the housing market in 2025 remains the ongoing demand for housing. We’re facing a situation where demand continues to outstrip supply, and that will remain a significant challenge throughout the year.  

The UK’s population has been steadily growing and is projected to reach 73 million by 2036, compared to 63 million in 2011, and with this growth comes increased demand for housing. However, it’s not just the population’s size that’s evolving, but also its demographic makeup. 

We’re seeing a marked shift towards an aging population, with people over 70 expected to make up over 16% of the population within the next decade. This has significant implications for housing provision. The increase in UK net wealth since the financial crisis has been concentrated in older homeowners, with a growth in the owned outright tenure and 65% of those over 70 living in ‘under-occupied’ homes'.1

As well as facing into a shortage of homes for first time buyers, we’ll simultaneously see rising demand for accessible housing and retirement living options. Unlocking barriers to downsizing and meeting later life housing needs will require a new level of flexibility and forward-thinking within our sector. 

The new government has proposed reforms to the planning system, which could be helpful to support new build properties – but, as we’ve said, it will take some time for the effects of that to come through.  

Obtaining the correct planning permission is just the start. We’re facing a shortage of people with the right skills in the construction sector, so we also need to be focusing on recruitment at the same time as getting spades in the ground. Targets can be set and planning red tape removed, but if there isn’t the workforce to deliver on those plans – to build those walls, plumb those toilets, wire those plug sockets – housing delivery will continue to stall. 

And so, while these changes are welcomed, there will inevitably be a time delay between reforms, implementation and housing delivery - the impact of which we won’t see this year. 

 

Tackling the skills shortage in the UK property sector

6 Dec 2024 | Jessica Tomlinson

Find out how the skills shortage in the housing sector is affecting the number of genuinely affordable properties being built.

Read Jessica's article Read David's article about tackling the skills shortage in the housing sector (opens in same tab).

Buy to let in 2025 

The buy-to-let market looks subdued by historical standards, especially compared to the boom of the early 2000s, but it’s in a similar shape and size to how it was looking in 2024. Today, with changes in taxation and additional regulatory scrutiny still to come, the landscape for landlords has become more complex. While the market still sees value in buy-to-let, we’re seeing some investors, particularly smaller landlords, stepping back, which has consequences for rental supply and affordability for renters.  

As growth in this sector has begun to slow, it's likely rents will continue to increase in local markets where positive earnings expectations create affordability headroom. And if landlords do their research into these pockets of the private rental sector, they can continue to make good investments and benefit from upbeat Housing Price Index expectations.   

Looking to Scotland where there has already been significant reform to the Private Rented Sector. We’ve seen 6% fewer landlords yet a 3% growth in the number of rental properties since March 2020. This points to a consolidation of landlords' portfolios and gives reassurance that landlords continue to want to invest to meet demand.

As proposed reforms become finalised for England, landlords will be looking to understand what it means for them, which is where lenders, and property and mortgage professionals have the opportunity to step in and provide support and education to ensure a thriving private rental sector that works for everyone. 

 

Will housing get more sustainable in 2025? 

New build homes tend to be more sustainable, with average EPC ratings of A or B. They’re much better insulated than older homes, and cheaper to run. And that will only get better as the Future Homes Standard - new regulations which are set to increase the building performance of new homes in the UK - is implemented from this year onwards. 

We’re seeing limited appetite for retrofitting of existing homes, but there is an encouraging take up of solar panels, especially with those customers installing EV charging points. We know that EVs are often the gateway to customers thinking about the sustainability of their homes, and so in 2025 we need to make sure we’re having these joined-up conversations with customers.

 

Will the housing market crash in 2025? 

With all the unknowns and volatility across the market, there are large online search volumes around what will happen in the housing market this year. Right now, there’s nothing that would suggest there’s going to be a housing crash in 2025, but it is dependent on the UK economy.

That being said, those geopolitical risks are still present. And so, while we can be optimistic that the housing market will remain stable in 2025, we still need to keep a close watch on how international changes can impact us in the UK.  

Housing 

Andrew Asaam
About the author Andrew Asaam

Homes Director, Lloyds Banking Group

Andrew Asaam is a banking professional with over 25 years' experience working in financial services.

During this time he has covered a number of areas including M&A, multi-year change, credit risk and P&L ownership. Andrew is currently the Mortgages Director for Loyds Banking Group covering all brands and channels.

During his career he has held various leadership roles including Director of Mortgage and General Insurance at Virgin Money and as Credit Risk Director at TSB looking after all retail and business banking products.

Follow Andrew on LinkedIn.

Related content