After decades of super-charged house price growth, capped off by the pandemic-era frenzy, the past few years have been something of a damp squib.
Homeowners accustomed to annual double-digit price rises as a way to ride the market and grow their equity have faced a very different market. As interest rates shot up, the cost of borrowing soared, demand for property slumped – and so did house price growth, falling 1.8% in 2023, according to Nationwide.
But momentum is now back in the market. Property portal Zoopla has predicted house prices will rise by 2% by the end of 2024, and research firm Capital Economics has predicted a 5% jump in 2025.
Forecasts from Savills suggest that the average house price will rise by up to 5% every year from 2025 to 2028. At this rate, house prices will increase by 21.6% in the next five years, taking the average from £280,000 at the start of 2024 to £340,600 by 2028.
Despite these optimistic projections, most analysts believe the days of soaring house prices are long gone: homeowners will be lucky to see consistent positive returns of 3% to 5%.
As interest rates fall, will the market heat up again – or are we in a new normal of incremental growth?
A resilient market
Last year, house prices fell and demand collapsed. Now, the conditions that stifled the market – namely very high mortgage rates and a cost-of-living crisis – are easing.
The Bank of England lowered the Base Rate from 5.25% to 5% recently. The average two-year fixed rate mortgage has fallen from its peak of 6.86% in July 2023 to its current level of 5.27%.
Lenders have been cutting rates in recent weeks in anticipation of the Bank Rate cut, which is helping to boost demand. At the end of July, Nationwide dropped the rate on its five-year fixed rate mortgage by 0.19 percentage points to 3.99%, though it was reserved for those who could put up a 40% deposit.
There is also a greater supply of homes for sale, according to Zoopla. As a result, demand is increasing and house prices rose 2.1% in the year to July, according to Nationwide. The markets expect average mortgage rates to fall over the coming years, according to Capital Economics, dipping nearer to 4% between now and 2027. In tandem, Savills has forecast house prices will tick up, as borrowing becomes cheaper.
Despite the fact that house prices fell in 2023, analysts were expecting a much steeper dip – but the market remained resilient. This was in part because people simply did not transact.
Lucian Cook, of Savills, says “first-time buyers have been holding up the housing market. A lot of buy-to-let investors have left because they can no longer make the sums add up. And lots of people who might have moved house before – to upsize, for instance – have been happier to stay in their homes and try to just make do, as they can no longer afford higher repayments.”
The prized double-digit house price increase
While the Savills’ forecast of a 20% rise in just five years may sound significant, it’s instead a sign of a much calmer housing market.
During the most significant house price rises in recent years – notably between 2002 and 2005, and then from 2020 to 2022 – a specific confluence of events created the booms. Between 2002 and 2005, house prices rose annually by an average of 28pc, according to Land Registry data. Mr Cook attributes this in part to more affordable property compared to incomes.
In 2023, full-time employees in England could expect to spend around 8.3 times their annual earnings buying a home, according to government figures; in 2002, this number was 5.12.
He also cites the emergence of the buy-to-let sector, along with a much less-regulated mortgage market as key factors; for example, 95% and 100% loan-to-value mortgages were commonplace. The housing boom that took place during the pandemic, when annual house price increases peaked at 13.8pc, occurred against a backdrop of historically low mortgage rates, which meant aspiring homeowners could borrow more.
Mr Cook also describes how "a “race for space” during lockdown pushed buyers to aspire to own larger, more expensive homes. A stamp duty holiday also encouraged a buying frenzy. To get double-digit house price growth, you need very special circumstances to occur. We may still see bursts of strong house price growth – for example, due to ‘Black Swan’ events such as the pandemic – but generally we’re in for a period of greater stability. We will see a return of house price rises, but we’re entering this new period from a starting point of highly stretched affordability. The most important variable that determines how much house prices will rise is the extent to which the Bank Rate falls.”
Richard Donnell, of Zoopla, agrees that the days of rock-bottom interest rates – and therefore meteoric house prices rises – are over. “Economists think that the Base Rate will settle out at 3.25% to 3.5%, which means we probably won’t have mortgage rates below 4%. We’re not going back to the days of 1% or 2% mortgages. Falling mortgage rates, falling inflation and rising incomes should push prices higher, but a large proportion of people are also constrained by mortgage affordability.”
The average first-time buyer deposit is £53,414 in 2024, a 67% increase compared to a decade ago, according to Lloyds Bank. It found that most first-time buyers are joining forces to find the means to get on the property ladder, with 63% of mortgage completions in joint names.
"Property is so expensive compared to incomes that lower rates only go so far, just because mortgage rate rises have cooled a little, it doesn’t mean it’s much easier for people to pass mortgage affordability checks than it was when rates were far lower”says Mr Cook.
The areas likely to see the most house price growth
Mr Donnell believes that Scotland, the North of England and the Midlands are most likely to see above-average house price growth. “These are the most affordable markets, and could see significant growth over the next three to five years. The housing market is simply an extension of the economy. If the economy is growing, living standards are increasing and incomes are rising – and there is more headroom for that in some areas than others – house prices will benefit.”
Aberdeen is the most affordable city to purchase a first-time buyer property, with the average costing just £102,601, with Bradford, Sunderland, Carlisle and Preston close behind.
From £19K semi-detached houses to £215K flats: The soaring cost of UK first homes over the decades
These computer-generated images reveal the evolution of the average first-time buyer's home over the decades.
From the beginning of this decade, the typical first home has been a two-bedroom flat, featuring two bathrooms and six rooms in total, without a garden, priced at £215,699. However, back in the 1970s, the standard property was a two-bed, semi-detached house, with people remembering paying a mere £19,309.
When adjusted for inflation, that would be equivalent to £92,172.55 today. Consequently, the amount required to borrow for a first home has seen a significant increase.
In the 1970s, individuals reported their first-time mortgages averaged at £11,149 - or £52,220.75 in 2024 when taking inflation into account. But according to data from Yorkshire Building Society, that figure now stands around £200,000.
Moreover, even though first-time buyers seem to be downsizing their expectations to smaller properties - with less room and minimal or no outdoor space - first homes now cost 6.04 times the average income of £35,724. This is a stark contrast to around 2.69 times the typical UK salary back in the 1970s.
Additionally, the average 10% deposit is much more challenging to accumulate today, standing at £20,000 - more than half of the usual annual earnings - making it one of the most significant obstacles to homeownership.
Computer-generated image of an average home in the 2020s © SWNS
Ben Merritt, director of mortgages at Yorkshire Building Society, which is offering a leg up to first-time buyers with homes worth up to £500,000 available on just a £5,000 deposit, remarked "achieving homeownership isn't easy. We know that house price growth means people are having to borrow much more than their incomes to get on the property ladder, and for some it's now, sadly, completely out of reach. We want to do our bit to make sure everyone who wants to own their own home has a fair chance of fulfilling their dream."
The landscape of first-time home buying has evolved over the decades. While the number of bedrooms in properties bought since the 1970s has stayed fairly consistent, the type of first homes purchased has shifted.
Terraced houses were the go-to choice in the 1980s, but by the 1990s, semi-detached homes, often complete with a private driveway, became the preferred option. Currently, flats have taken the lead as the most sought-after entry-level property, making up 28 per cent of all first-time buyer purchases.
Changes aren't just inside the home; outdoor spaces are also seeing a transformation, with a noticeable decrease in the number of people owning a garden. Back in the 1970s, a substantial 85 per cent of homes boasted a garden, yet this figure has fallen to a mere 66 per cent in the 2020s.
Moreover, the age at which individuals step onto the property ladder has been creeping upwards, from an average of 24 years old in the 1970s to 30 years old in 2021.
Computer-generated image of an average home in the 1970s © SWNS
In past decades, securing an affordable property was a top priority for homebuyers, with 73% and 72% emphasising this in the 1970s and 1980s. Today, this figure has dipped to 47%, yet there's a significant uptick in concerns over getting a sizeable mortgage, sitting at 29%, markedly up from the mere 11% back in the 80s.
Ben added "it's clear from the research that some of the factors behind people's choice of first home have remained stable, like location and how short their commute will be. However, there is growing frustration at how difficult it is to raise a deposit and get on the property ladder, thanks to above-inflation house price rises and ongoing cost-of-living pressures, pushing this prospect further and further out of reach. It just goes to further highlight the scale of the challenges today's generation of first-time buyers must overcome now to get a look-in, despite being willing to compromise on quality-of-life aspects like having a garden.
We firmly believe their aspiration and hard work should be rewarded, which is why we will continue to look at innovative solutions to help them bridge the ever-increasing gap, and to call for industry-wide change aimed at improving the prospects of first-time buyers, via our Home Truths report."