Prognosis for the UK real estate market: will prices remain flat?

Although home prices have increased recently, Kaylie Pferten says the housing market's long-term prospects are not good

In the last year, the cost of flats increased by just 0.5 percent, while house prices in the UK increased by just 2 points, according to Zoopla. While Nationwide is more optimistic, Halifax projects a 2.9 percent annual increase in home prices. In England, it shows a 31% year-over-year increase for the fourth quarter, compared to 27% in Wales, 44% in Scotland, and 71% in Northern Ireland. The England estimate obscures a large regional disparity: prices were only 2% higher in southern England but 44% higher in the Midlands and the north. Prices in East Anglia increased by just 0.5 percent.

Monthly data is also produced by Halifax and Nationwide, though it can be unpredictable. Since the figures can originate from surveys of real estate brokers, completed transactions, or mortgage arrangements, they are always different from one another. Transaction data might not accurately reflect the market as a whole. It will leave out certain private transactions or properties that don't sell. That is to say, it is not very trustworthy.

However, it is assumed that home values will continue to rise without regret and with only sporadic hiccupsthey always have and always will. Customers' behavior is based on that assumption. You might as well purchase a larger than necessary home in a more upscale area if the value of your house will increase steadily and capital gains tax-free. You will accept a low rental yield if you are purchasing to rent because capital appreciation will offset it.

However, Nationwide notes that prices "were still just below the all-time high recorded in summer 2022" at the end of 2024. Based on regional data, price hikes in the north appear to have caught up to those in the southeast and London. If so, they will now reduce their speed.

"The market has gone nowhere in the last ten years" at the top of the market (prime central London), according to Charlie Ellingworth of Property Vision. "Although there have been some exceptional sales, the market is still essentially flat. Non-domiciles are fleeing this end of the market, which has been exacerbated by their inclusion in the inheritance tax (IHT) net in the most recent budget. Ellingworth claims that the deterrent effect on prospective foreign buyers is equally significant.

A collapse of the housing market after COVID.

"Had a noticeable spike over the Covid years that has unravelled recently, reflecting the retreat from working from home," he claims of the rural market. Good properties in good locations are still in demand, though, because "the internet and working from home have enabled people to extend their weekend and live further away." The same is true in London, where large developments that provide "good transport links and a good range of shops, cafes, and restaurants" are well-liked in contrast to "so many of the riverside developments that future generations will regard as sad failures."

The house price-to-earnings ratio is still significantly higher than the long-term average, but affordability is improving in the overall market as earnings increase. Furthermore, this ignores rising interest rates, which might return to 4 percent but not to the sub-1 percent levels of a few years ago. The availability of low fixed rates a few years ago provided protection for mortgage borrowers, but these offers are quickly coming to an end.

Affordability is also measured without taking into account the steadily increasing stamp duty, which will soon be zero on the first 125,000. For a property that costs 500,000, a buyer will pay 3 percent; for a property that costs 1 million, 4 percent; and above 1 million, the marginal rate increases from 10 percent to 12 percent. Purchases under 625,000 are slightly less expensive for first-time buyers, but second-home buyers and non-residents pay an additional 5% and 2%, respectively.

The council tax is expected to increase significantly above the rate of inflation because many councils are experiencing financial difficulties. After paying only half a decade ago, those purchasing second homes will now be required to pay double tax. Service fees for apartment buyers are rising quickly, particularly if cladding repair is required. This probably explains why, as Zoopla reports, price increases for flats are lagging those for houses.

The costs of obtaining the necessary number of energy-performance certificates, increased management expenses, increased net income taxation with fewer deductions before net income is determined, and increased capital gains tax on disposal are all facing buy-to-let investors and vacation home rental owners. Locals in vacation spots have grumbled about being priced out of the market. However, they wouldn't want to reside there if it weren't for the tourism industry.

The promise of capital gains, in addition to a respectable level of net income that increases at least in step with inflation, has always been the allure of buy-to-let investing. However, if expenses, taxes, and regulations are depleting net income, capital gains will vanish, and the investor will require a significantly higher level of net income in their absence. It's understandable why so many are selling, but buyers are not drawn to the potential profits.

For homebuyers, the same holds true. The motivation to purchase the largest property you can afford vanishes and the desire to downsize later in life rises if price increases are no longer anticipated. Self-fulfilling confidence in higher prices was the result. Now, the opposite might be true. One developer claims that housing was the goose that laid the golden egg for succeeding governments, allowing them to tax repeatedly.

However, the government's plan to build (or have the private sector build) 300,000 new homes annually for five years has been heavily criticized, with the industry citing labor, material, and site shortages. Surely, the UK is chronically short on housing?

Confronting the NIMBYs.

Nevertheless, it is likely that the planned modifications to the planning laws will go forward and have some impact on supply growth. Ellingworth notes that NIMBYs are concerned that "Labour is a predominantly urban party with little sympathy for countryside."

The Telegraph recently reported that Rachel Reeves' "build, build, build" mantra was engulfing golf courses in the United Kingdom. According to the article, "at least one in six of the nation's courses are in such bad shape that they may soon be shut down." Already this year, there are more than ten courses that have closed or are scheduled to close, with at least three being made way for new homes.

It is now simpler than ever to build on the green belt, and even projects that have been turned down by council planning committees in the past can now be easily approved by planning inspectors.

The primary factor impeding demand is household formation, which, according to Statista, has grown by 0.6 percent annually on average over the past 10 years but 0.4 percent in 2023. Because of the strong resemblance to population growth, household sizes are not declining. Household formation and population growth are reliant on immigration since the fertility rate is currently significantly below replacement level. As almost all other developed nations currently do, it is reasonable to assume that this government or the one that follows will severely restrict immigration.

When this occurs, the supply of housing will increase while household formation and population growth will reverse. Prices are not going to rise as a result of this. Instead of increasing the cost of new homes and, consequently, the value of existing ones, rising building costs, exacerbated by inflation in wages and material prices, as well as increased national insurance and regulation, should reduce land values and squeeze homebuilders' profits.

It is possible that people will discover that residential real estate is not an investment but rather a place to live for a long time. There will always be deals based on location, quality, and mispricing. The times when a growing market would save you from overspending, however, are long gone.