House costs will develop £84k from now till 2029 with the North driving the growth as Savills uprates forecasts

The typical home will grow £84,000 in value from now until 2029, according to latest house price predictions from Savills.

The property firm now predicts average home values to increase 4 per cent in 2025 and then 23.4 per cent by the start of 2029.

Earlier this year, Savills forecast house prices to rise 3.5 per cent by the end of 2025 and 21.6 per cent over the next five years.

The uprating by Savills comes in light of inflation returning to the 2 per cent target and the prospect that interest rates will continue to fall over the next two years, based on forecasts by Oxford Economics. 

They have taken a similar stance to Santander in forecasting that interest rates will fall to 3.75 per cent by the end of next year.

However, while Santander is expecting interest rates to remain between 3 and 4 per cent for the foreseeable future, Oxford Economics forecasts they will fall to a low of 2 per cent in 2027.

After two years in which the rate of inflation has far outstripped the rate of house price growth, Savills is now expecting the opposite to occur. 

Now that inflation is back on target, Savills forecasts a return to real house price growth (after inflation) of 11 per cent over the next five years – as opposed to the 10.5 per cent fall in real growth since August 2022. 

This, it says, will take inflation-adjusted prices back to where they were before the mini-budget. 

‘With less external noise, house prices in the medium term will be dictated by the fundamentals of demand, supply and affordability,’ said Lucian Cook, head of residential research at Savills.

‘The direction of mortgage rates has been key to buyer decisions over the past two years, and decreased monthly mortgage costs are now feeding through into improved confidence amongst prospective buyers, prompting the moderate house price growth we have seen over the past few months.

‘A steady improvement in affordability should allow for house price growth to gain momentum over the next couple of years. But there is still some potential for a bumpy ride. 

‘The market will remain sensitive to short-term fluctuations in the cost of debt and changes to property taxation have the potential to cause some short-term disruption.’

However, house prices behave differently from area to area. The housing market is not one market, but thousands of micro markets all behaving differently. 

Regional performance is largely influenced by where we are in the housing market cycle. 

The housing market has been in the second half of the cycle since 2017, according to Savills. 

This is where the more affordable regions in the North and Scotland outperform the UK average while growth in London and the South is more limited.

However, the pandemic brought about behavioural changes that somewhat disrupted cyclical trends.

‘Lower levels of homeworking and the need to return to commuter hotspots near major employment hubs has driven slightly stronger than expected performance in London over the last 12 months,’ said Emily Williams, director of research at Savills.

‘We expect to see some residual impact of the unwinding of the ‘race for space’ in 2025, bringing growth in the South West and East below that of the capital.

‘But beyond 2025, affordability will have the biggest influence in every region. 

‘Despite falling mortgage rates, buyers in London and the South East will still need to borrow more relative to their income and accumulate a bigger deposit to buy, constraining house price growth.’

Savills expects the more affordable markets in the North, where mortgaged buyers are under less strain, to see the strongest acceleration in house prices.

Verona Frankish, chief executive of online estate agent Yopa said: ‘Affordability remains a burning issue for many homebuyers and so whilst the outlook is a positive one due to forecast reductions to interest rates, regions where property values are already over inflated are likely to see a more measured property market performance over the coming years.

‘In contrast, regions such as the North East are likely to see continued growth due to the more affordable cost of climbing the ladder, however, we expect to see a greater proportion of activity come from second and third run steppers rather than first-time buyers.’

Market activity to recover

The property market has seen lower levels of transactions over the past two years as a result of higher mortgage rates.

This has had the most significant impact on home movers, typically most exposed to mortgage debt. 

Between April and June this year home mover transactions fell below the level seen in 2008/09, the aftermath of the financial crisis, according to Savills.

Overall, transaction numbers are expected to remain slightly below their pre-pandemic average over the next five years, peaking at 1,150,000 in 2028. 

However, recovery will not be uniform, according to Emily Williams of Savills.

‘Looking ahead we can expect some home movers to continue to hold off on moving until rates settle in 2027, when they will have also benefited from several years of house price growth to build up equity,’ said Williams.

‘As such, there is potential for a sharp rise in activity among second and third steppers in the second half of our forecast period, as pent-up demand from the period of high interest rates is released.

‘However, the number of first-time buyers active in the market is expected to stay below pre-pandemic levels due to a lack of any government support to replace Help to Buy. 

‘While increased regulation in the rental sector, combined with the newly increased second-home surcharge, will further dampen demand from both cash and mortgaged buy-to-let investors.’