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UK Housing

UK Housing Outlook: Housing relatively well insulated from Trump tariffs

1st May, 2025

While the more uncertain global backdrop due to the new US tariffs regime means we have become more confident in our below-consensus UK GDP forecast, the prospect of falling mortgage rates suggests UK housing demand is well insulated from US tariffs and transactions will continue to recover to more normal levels.
Paul Dales
Paul Dales
Chief UK Economist

This is a sample of our latest quarterly UK Housing Outlook, originally published on 1st May, 2025. Some of the forecasts contained within may have changed since publication. Access to the complete report, including extensive forecasts, near to long-term analysis and interactive data resources, is available as part of our subscription services.

With earnings set to continue to grow at a decent rate over the next few years, in the year to Q4 we forecast house prices to rise by around 3.5% this year, by 4.5% next year and by 3.5% in 2027, which is more than the consensus. Interest rates could fall a bit quicker than we expect this year, but if that’s partly due to a weaker economy then house prices may not rise any faster.

Demand

  • While the weaker economic outlook presents a challenge to the recovery in housing transactions, we doubt it will prevent demand from rising back to its pre-pandemic levels.
  • After surging from 95,450 in January to 177,370 in March as buyers brought forward house purchases ahead of stamp duty becoming more onerous from 1st April, we think housing transactions will fall sharply in April, before gradually picking up thereafter.
  • We don’t think transactions will be much weaker as a result of the new US tariffs regime. Admittedly, the higher uncertainty caused by US tariffs and the associated drag on the economy may weigh on housing demand in the near term. The RICS new buyer enquiries balance points to a marked fall in transactions growth. (See Chart 1.)
  • But this will probably be offset by mortgage rates falling sooner than we anticipated. The 40 basis points drop in 2-year swap rates since ‘Liberation Day’ may mean 2-year fixed mortgage rates fall from 4.5% in March to about 4.1% in April. (See Chart 2.)  

Chart 1: RICS New Housing Buyer Enquiries Balance & Transactions

Chart 2: 2-Year Swap Rate & 2-Year Mortgage Rate (%)

  • Further ahead, though, mortgage rates may fall a bit slower than we previously thought. The bigger rise in the unemployment rate that we now forecast may mean lenders raise their net interest margins a bit further. (See Chart 3.)
  • Our forecast is for the average quoted mortgage rate to fall from 4.5% in March to 4.2% this year, to 4.1% in 2026 (4.0% previously) and to just below 4.0% in 2027. Our affordability model suggests this would cut mortgage payments for a new buyer on a 25-year term from 38% of income at the end of 2024 to just above 35%. (See the blue line on Chart 4.) While that would be above the 2019 average of 28%, there are three reasons why we think demand will still recover to its pre-pandemic levels.  

Chart 3: Unemployment Rate & Bank Mortgage Net Interest Margin

Chart 4: Monthly Mortgage Payment for a New Borrower (As a % of Median Full-Time Salary)

  • First, the proportion of mortgage borrowers taking out new mortgages with terms of 30 years or longer has risen from 12% in 2005 to 50% in 2023. (See Chart 5.) Within that, the share of 40-year mortgages has jumped from 3% at the start of 2021 to 10% in 2023.
  • On our forecasts, the monthly payment on a mortgage with a 40-year repayment term would take up 28% of the median income, which would be the same as a 25-year mortgage in 2019 despite higher mortgage rates. (See the green line on Chart 5.) This boost to affordability explains why we expect the number of housing transactions to rise to around its pre-pandemic level of 100,000 a month in 2027. (See Chart 6.)   

Chart 5: New Mortgages Issued With Repayment Term of 30+ Years (% of Total)

Chart 6: Housing Transactions & Mortgage Approvals (000s Per Month)

  • Second, despite the recent fall, consumer confidence doesn’t point to a collapse in transactions. (See Chart 7.) And looking ahead, a recovery in employment from 2026 and decent wage growth suggests a gradual improvement in consumer sentiment will support a recovery in transactions. (See here.)
  • Third, the Chancellor’s push for “growth” is encouraging mortgage lenders to apply looser affordability requirements and to lend more to buyers. That may allow some of those previously priced out of the market to buy.
  • Overall, despite the softer economic outlook, we forecast transactions to rise from 1.09m in 2024 to 1.14m in 2025, to 1.17m in 2026 and to 1.20m in 2027. That would be in line with the monthly pre-pandemic average. (See Chart 8.) Mortgage rates could fall a bit faster than we expect this year, but if that’s partly due to a weaker economy then the recovery in housing demand may not be any stronger.

Chart 7: Consumer Confidence & Housing Transactions

Chart 8: Residential Housing Transactions (000s Per Month)

Supply

Planning reforms aren’t shifting the dial on supply

  • While housing supply will continue to recover from the lows of 2023, we remain pessimistic about the chances of the government hitting its target of 300,000 new homes per year.
  • The number of homes for sale, which flatlined in late-2024 at a relatively low level (see Chart 9), may only rise gradually as housing demand rises only modestly.
  • Moreover, there is still relatively little new supply in the pipeline. While housing starts in England rebounded from just over 20,000 in Q4 2023 to just below 31,000 in Q4 2024, they are still well below the 2014-19 average of 38,700 per quarter. And NHBC plot starts suggest housing starts fell back a touch in Q1, leaving starts even further below the government’s target to build 300,000 homes a year. (See Chart 10.)  

Chart 9: RICS Unsold Stock Per Surveyor* (Balance)

Chart 10: Housing & Plot Starts in England (000s)

  • Admittedly, the government’s reforms intent on ungumming the planning system should encourage further homebuilding. Indeed, NHBC homebuilders plan to raise the number of starts over the next year. (See Chart 11.) And the share of planning applications approved has risen too. But ultimately, the government’s reforms won’t be enough to raise homebuilding to the government’s target over the next few years for two key reasons.
  • First, these reforms include no significant increase in public sector housing construction. Since the slump in public sector construction in the 1980s, completions have been driven almost entirely by private construction. (See Chart 12.) And as private homebuilders will only build homes in line with demand - to avoid dampening prices - private completions will continue to track transactions.  

Chart 11: NHBC Planned Starts Next 12 Months & Plot Starts in England

Chart 12: Housing Completions in England (000s Per Year)

  • And as we’re only forecasting transactions to rise from around 290,000 per quarter in Q4 2024 to about 300,000 in Q4 2027, we only expect starts to rebound from 30,900 in Q4 2024 to 40,000 in Q4 2027. (See Chart 13.)
  • Second, even if the government launched a national homebuilding programme and/or higher buyer demand encouraged more private homebuilding, we suspect labour and material shortages would then be a bind.
  • Based on the past relationship between the number of additional dwellings per year and the level of construction employment, we estimate around 500,000 more construction workers would be needed to build 300,000 homes a year. (See Chart 14 and here.) Given the conflict between the government’s pledge to reduce net migration and the industry’s dependence on foreign workers, recruiting 500,000 new workers seems unlikely.  

Chart 13: Housing Starts & Transactions (000s Per Quarter)

Chart 14: Net Additional Dwellings & Construction Employment in England

  • Furthermore, a shortage of materials may also prove to be a constraint. For example, while bricks are used less in housing construction now compared to pre-2000, hitting the government target would mean the supply of bricks needs to be ramped up towards levels last seen in the 1980s. (See Chart 15.)
  • Meanwhile, despite the recent rise, the input prices balance of the construction PMI is still consistent with materials price inflation in line with historical norms. (See Chart 16.) That said, although we don’t expect Trump’s tariffs to materially influence housing supply, there is a risk that disruption to global trade means materials price inflation accelerates further. That would be another drag on construction.
  • Overall, we expect housing starts to total around 450,000 between 2025 and 2027, half of the 900,000 in line with the government’s target. That means supply will remain relatively tight and continue to support prices.

Chart 15: Brick Deliveries & Housing Starts

Chart 16: Construction PMI Input Prices & Materials Inflation

Prices

House prices more immune to Trump’s tariffs than other asset prices

  • UK house prices will be more resilient to the uncertainty caused by the new US tariffs than other asset prices. And with average earnings set to grow at a decent rate, we forecast house prices to rise by an average of 4.0% in 2025-27. That’s higher than the consensus forecast.
  • The recent softening in house prices, as shown by the 0.5% m/m fall in the Halifax measure in March and the 0.6% m/m drop in the Nationwide measure in April, may last for a few months. Indeed, the fall in the price expectations of surveyors implies that the annual growth rate of house prices will slow from 3.0-3.5% to zero. (See Chart 17.)
  • In fact, the fall in new buyer enquiries relative to new selling instructions received by estate agents points to annual house price growth slumping to around -3%. (See Chart 18.)

Chart 17: RICS Price Expectations & House Prices

Chart 18: RICS New Demand-New Supply & House Prices

  • We doubt much, if any, of this softer outlook is due to the new US tariffs hitting confidence in the UK’s housing market. Even though UK equity prices have fallen, they aren’t sending a very worrying signal for house prices. (See Chart 19.) And the future earnings of firms, which influences equity prices, are always going to be affected more by import tariffs than the future value of housing.
  • Instead, we suspect a chunk of the weakening is due to a soft patch caused by purchases being brought forward ahead of stamp duty becoming more onerous from 1st April.
  • This doesn’t mean the annual growth rate of house prices won’t slow. But our view that demand will continue to climb relative to new supply suggests house price inflation will stay above zero. (See Chart 20.)

Chart 19: Equity Prices & House Prices (%y/y)

Chart 20: Demand/New Supply & House Prices

  • In fact, even though the annual growth rate of average earnings will slow from the highs of the past few years (see here), we still expect earnings to grow by an average of 4.0% over 2025-27. That implies there is scope for house prices to grow at a similar rate. (See Chart 21.)
  • This underpins our forecast that in the year to Q4 prices will rise by 3.5% this year, by 4.5% in 2026 and by 3.5% in 2027.
  • It’s possible that prices could rise faster than earnings if mortgage lenders continue to loosen their lending criteria. By the end of 2024, both the average loan to value (LTV) and loan to income (LTI) ratios on all mortgages issues had reversed some of their previous falls. (See Chart 22.)

Chart 21: Average Earnings & House Prices (%y/y)

Chart 22: Loan to Value & Loan to Income Ratios on All Mortgages Issued

  • And in January, in response to the Chancellor’s push to boost economic growth, the FCA suggested that lenders could build in more “flexibility” when assessing how future interest rate rises could influence a borrower’s mortgage payments (i.e. the “stress test”).
  • By April, a Bank of England survey found that lenders intended to raise the supply of mortgages at LTVs of more than 75% by a bit more than loans at LTVs of less than 75%. (See Chart 23.) But they weren’t planning on raising their maximum LTVs or LTIs. For now, we view looser lending standards as an upside risk to our house price forecasts.
  • Meanwhile, we suspect that the widening in the price premium of larger homes relative to flats since the pandemic will be sustained, but won’t grow much more. (See Chart 24.) Admittedly, the post-pandemic surge in demand for larger homes appears to be past its peak. But the relative supply of larger homes has not risen much. As a result, prices of flats and homes may both grow in line with overall prices. (See here.)

Chart 23: BoE Credit Conditions – Availability of Mortgages (Balances)

Chart 24: Land Registry House Prices (2019 = 100)

This is a sample of our complete UK Housing Outlook prepared for Capital Economics clients, published on 1st May 2025 and written by Paul Dales, Ruth Gregory, Ashley Webb, Alex Kerr and Oliver Wilkes.

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