Affordability vs. Demand: The UK Housing Market’s 2025 Landscape
Zahrah Oyeleke
The UK housing market has experienced steady price growth in recent years, but the pace of increase has slowed, reflecting affordability challenges and shifting economic conditions. In January 2025, house prices rose for the fifth consecutive month by 0.1%. This growth has slowed from the 0.7% increase in December 2024 and the 1.2% increase in November 2024.[1]
House Prices Through the Decades
House prices in the UK have generally trended upward, but the rate of growth has varied. In the early 2000s, there was a significant increase in house prices driven by a strong economy, easy credit availability, and high demand in London and the Southeast. However, the 2008 financial crisis led to a sharp decline, with average house prices falling by almost 20% as lending tightened and economic uncertainty increased.
Following the crisis, the market slowly recovered, with prices rebounding by the mid-2010s due to historically low interest rates and government incentives like Help to Buy. The COVID-19 pandemic in 2020 briefly disrupted the market, but house prices soared soon after, driven by stamp duty holidays, the rise in remote working, and increased demand for suburban housing.
Figure 1: Average UK house prices between January 2005 and December 2023
Are Houses becoming more affordable for first-time buyers?
According to Nationwide, house prices remain high relative to earnings, with a price-to-earnings ratio of 5.0 at the end of 2024—significantly above the long-term average of 3.9.[1] The growth in house prices is outpacing the rise in wages, making it more difficult for first-time buyers. Mortgage rates, a crucial factor in home affordability, also remain high. As of January 2025, the two-year fixed mortgage rate stands at 5.48%, while the five-year fixed rate averages 5.25%. With mortgage rates still relatively high and the cost of living putting pressure on disposable incomes, potential buyers are expected to delay home purchases or opt for smaller properties in more affordable regions.
Figure 2: House price-to-earnings ratio for first-time buyers between 1985 and 2024
Sustained Demand and Factors Driving Housing Market Activity
Despite the affordability challenges, demand for housing in the UK has remained high. House sales have risen steadily, particularly in London, reaching the highest levels since before Brexit. The volume of sales agreed has risen by 12% in January 2025 compared to the previous year, leading to the strongest start to the year in 3 years. This sustained demand has been a contributing factor in the rise in house prices.
This surge in demand is partly due to buyers taking advantage of the stamp duty holiday before it expires on the 31st of March 2025. Under this scheme, first-time buyers currently pay no stamp duty on properties up to £425,000, providing substantial savings. Once the stamp duty holiday ends, the threshold will be reduced from £425,000 to £300,000, meaning that first-time buyers purchasing homes between £300,001 and £425,000 will face additional costs as they will now pay stamp duty charges. An estimated 20% of first-time buyers will now be required to pay stamp duty charges of up to £5,000 from April 1st, 2025, compared to zero before this date.[1] The upcoming change has led many buyers to speed up their purchases, boosting the housing market.
Rising wages and interest rate cuts have also encouraged buyers. With inflation showing signs of easing, the Bank of England cut rates from 4.75% to 4.5% to stimulate economic growth. Lower rates reduce borrowing costs, making mortgages more affordable, especially for buyers with variable rates. This has made buying a home more appealing, encouraging more people to enter the market while rates are still low.
Also, average wages in the UK have risen steadily, with average regular earnings growing by 5.6% in the 3 months to November 2024 compared to 2023.[2] This steady rise in wages has also contributed to the increased demand for houses as homeownership has become more accessible.
Figure 3: Average weekly earnings in Great Britain for total and regular pay from January 2000 to October 2024.
There continues to be a stark contrast in housing markets across the UK, with southern regions, including London, seeing slower growth or even price reductions, while northern areas have experienced a surge in property prices. In 2024, house prices in the North of England rose by 5.9%, significantly outpacing the South’s 2.2% increase. This difference is largely because of the North’s relatively lower average house prices and strong demand, driven by factors such as government investment in northern infrastructure and the rise of remote work, which has made these regions more attractive to buyers. In contrast, high property prices in the South have limited affordability, making it harder for first-time buyers to enter the market and slowing overall growth. Looking ahead to 2025, house prices are expected to rise across the UK, with the North continuing to outpace the South.
Future outlook
The new government has introduced policies aimed at boosting the housing market, including reforms to the planning system and an investment of £5 billion. These initiatives are expected to increase the supply of homes, with the affordable homes programme receiving an additional £3.1 billion in funding. This should make housing more affordable and accessible, benefiting first-time buyers and investors. However, challenges such as skills shortages in the construction sector and delays in planning reforms may limit the short-term impact.
The Bank of England has revised its inflation forecast, expecting it to rise higher than anticipated, reaching 3.7%. As a result, the likelihood of further rate cuts later this year has reduced, which is likely to impact the housing market. With borrowing costs and mortgage rates remaining high, potential buyers may find it more difficult to secure affordable home loans. This will likely slow the rise in house prices and further limit housing affordability. Additionally, the Bank of England has lowered its growth forecast, signalling economic uncertainty that may prompt both buyers and investors to delay major financial commitments, such as purchasing property, until the outlook improves.
References:
1. Sweney, M. (2025) 'UK house prices rise for fifth straight month but market "softening"', The Guardian, 31 January [Online]. Available at: https://www.theguardian.com/business/2025/jan/31/uk-house-prices-rise-for-fifth-straight-month-but-market-softening [Accessed 31 January 2025]
2. Romei, V. (2025) 'World's biggest offshore wind developer Ørsted replaces chief', Financial Times, 31 January [Online]. Available at: https://www.ft.com/content/e804b318-dae4-4428-8a62-8cc0642b1335 [Accessed 31 January 2025]
3. Gair, A. (2025) 'What the Autumn Budget means for first-time buyers and the housing market', Tembo Money, 14 January [Online]. Available at: https://www.tembomoney.com/learn/what-autumn-budget-means-for-housing-market-rachel-reeves [Accessed 1 February 2025]
4. Office for National Statistics. (2024) 'Average weekly earnings in Great Britain: December 2024', Office for National Statistics, 17 December [Online]. Available at: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/december2024[Accessed 2 February 2025].