By Tom Bill, head of UK residential research at Knight Frank
Evaluating the strength of the UK property market in the first quarter of 2025 has been challenging.
This week’s spring statement has created mild anxiety, the inflationary impact of certain policies introduced next month is unknown, and we can only take an educated guess as to how much April’s stamp duty increase is affecting buyer behaviour.
Added to that, it’s too early to predict the long-term impact of new rules for foreign investors and it’s largely futile trying to guess Donald Trump’s next move.
The good news is that some of this uncertainty will lift in Q2 as a ‘new normal’ takes shape. For the next four years, anyway.
So, what can the UK housing market expect as new governments get their feet under the table on both sides of the Atlantic?
The most pressing issue is next month’s stamp duty increase. Completing this month means a maximum saving of £2,500, or £11,250 for first-time buyers.
The last time £2,500 was at stake was in September 2021 during the final weeks of the stamp duty holiday introduced in the pandemic. Transactions that month rose 66% from August before falling 52% in October, HMRC data shows. A large bump this month is therefore inevitable.
Interestingly, demand tends to fall as stamp duty cliff-edges approach, with some buyers waiting for more settled conditions. The net balance of new buyers, which is the difference between the percentage of respondents reporting an increase and a decrease, was -14% in February, according to the latest RICS survey, which was the lowest figure since November 2023.
The same figure dropped over the summer of 2021, registering a fall of -5% in August. By October it was +19%, suggesting a desire to act once the playing field had been re-levelled.
A similar effect is likely this time round, said Andrew Groocock, chief operating officer of estate agency at Knight Frank.
“The key question will be how many transactions hold together in April once the deadline has passed and how open buyers and sellers are to price renegotiations,” he said. “There may be a bit of disruption but, in my experience, buyers are quick to adapt once changes have been made.”
In a further small but positive sign for demand, consumer confidence inched up in March, the latest GfK survey found last week.
Acceptance of a new normal could also underpin demand in the mortgage market, particularly when it looks like the old normal.
The Bank of England held rates at 4.5% last week and most five-year fixed-rate deals remain above 4%. The bank rate was the same in March 2006 and the five-year interest rate swap, which is used to price fixed-rate mortgages of the same length, ended the month above 4.8%, which compares to about 4.2% last week.
There were 132,080 residential transactions in March 2006, HMRC data shows. Affordability pressures are greater and lending criteria are tighter now, but that’s a large 39% jump on the figure recorded in January of this year in a similar rate environment. A bank rate starting with a 4 is clearly no barrier by itself to an active property market.
A sense of stability around rates would be welcomed by borrowers after the rollercoaster ride of double-digit inflation in recent years. Despite last week’s hold, financial markets were essentially pricing in two more quarter-point cuts by the Bank of England this year.
“I hope there will be mortgage rates of around 3.5% at some point this year, which would be helpful for buyers,” said Simon Gammon, managing partner at Knight Frank Finance.
Will stubborn inflation keep rates higher for longer, though? Higher employer national insurance contributions kick in next month along with an increase in the minimum wage, both of which will be inflationary. Spending linked to infrastructure and net zero will also ramp up.
These are some of the reasons that Savvas Savouri, chief economist at QuantMetriks, expects UK inflation to remain above 3% rather than hit the Bank of England’s target of 2% for the foreseeable future.
The inflation outlook should at least be clearer as the year progresses. That said, how much inflation or economic growth data influences rate-setters on the Bank of England’s Monetary Policy Committee is not always clear.
There are reports the Chancellor doesn’t plan to raise taxes at the spring statement this week. If the UK housing market comes out of this “fiscal event” on Thursday largely unscathed, it would certainly calm nerves. At least until this autumn’s Budget.
However, things have got worse and borrowing costs have risen since the Office for Budget Responsibility closed it’s forecast window in early February. “The majority of what Reeves presents at the despatch box will already be out of date by the time she delivers it,” said Michael Brown, a senior research strategist at financial broker Pepperstone.
It also appears there will be certainty for non doms from next month, just not the kind they initially wanted. With overseas assets unprotected from UK inheritance tax and the merits of an Italian-style flat tax unexplored as the Finance Bill enters its final stages, foreign investors will at least know where they stand.
Any annual assessment of the government’s new residence-based regime may initially be flattered by sums of money coming into the country under the so-called Temporary Repatriation Facility. The longer-term impact on the UK’s competitivity on the international stage will be harder to measure. Some investors have already left; others will sit out the next four years and hope for a change of government.
And finally, one factor beyond the control of the UK Chancellor.
The US economy is also transitioning to a new normal, which US Treasury Secretary Scott Bessent has likened to a detox. It will see the more widespread use of trade tariffs and substantial cuts to the federal workforce as the private sector does more of the heavy lifting. If tariffs prove to be inflationary, upwards pressure on borrowing costs will intensify, potentially on both sides of the Atlantic.
We will find out more next week, including whether tariffs will be levied on the UK in response to its VAT rules.
The outlook is certainly getting more settled but it’s too early to rule out the chance of further storms.
