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Inflation: What Does it Mean for the Property Market in 2025?

Inflation dropped in December. Here's what it means for the housing market in 2025.
While the Autumn Budget was widely agreed to be inflationary, a 0.1% drop in inflation could be optimistic news for the property market in the coming months.
The Budget added uncertainty, particularly for high-end residential markets. The introduction of a new Stamp Duty surcharge, changes to non-domiciled tax statuses, and elevated interest rates have dampened activity among prime residential buyers.
As we entered the New Year, there was an atmosphere of apprehension. Prior to the election, the government made economic stability and reformations to the housing sector a key pillar on their campaign. Unfortunately, however, economic growth across the UK has been slow.
The UK has seen challenging times over the past five years. In 2024, living costs eased thanks to lowered inflation, lower mortgage rates and wage increases, but bouts of uncertainty in the markets meant that the UK economy grew by less than 1% in 2024. It’s worth noting that this is more than it grew in 2023 when the UK ended the year in a recession.
Expectations are high, and many are relying on the prospect that good news will be arriving soon. If they can deliver, it won’t be forgotten. But this does mean that the small, incremental changes we are seeing are going amiss to the "working people" that the government has made the cornerstone of their manifesto as they will be much more focused on the bottom line.
That being said, small change is still change, and we could see it snowball in 2025. This is also reflected in last quarter's property transactions.
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What Can We Expect from the Spring Market?
HM Revenue & Customs (HMRC) data revealed a dip in residential transactions during November, with 92,640 sales recorded (on a seasonally adjusted basis). This is an 8% monthly decline but a 13% annual increase from 2023.
On a non-seasonally adjusted basis, 104,440 transactions were recorded – 19% higher annually but 6% lower than in October. Industry experts attribute this decline to a typical winter slowdown, exacerbated by heightened activity in October as buyers sought to secure deals ahead of the holiday season.
The annual growth demonstrates the market is in a stage of recovery, fuelled by competitive mortgage rates and increased housing supply. Provided that inflation remains stable, the spring property market is posed to be a busy one.
Why?
The market typically speeds up in the early months of the year following the holidays as consumers look to get their affairs in order.
As well as this, Stamp Duty will be increasing on April 1st. It’s likely that there will be increased levels of activity leading up to this point as buyers aim to save money before the tax goes up.
Furthermore, lower-than-expected transaction volumes and a relatively large housing stock have caused property value to drop in some areas. Mortgage rates are still slow to reduce, but buyers can benefit from more affordable house prices.
How is Limited Mortgage Affordability Shaping the Market?
High borrowing costs and affordability pressures still remain significant barriers for many buyers. Mortgage repayments have risen by 12% in the past year, and rents have climbed by 6%, according to recent data. Despite this, the market shows signs of resilience, with reduced interest rates and increased listings boosting confidence.
The Bank of England’s approach to tackling inflation will play a crucial role in shaping the market’s trajectory. While a fall in interest rates is anticipated, persistent inflation has kept borrowing costs high. Rising gilt yields and concerns over government borrowing have further strained the sector.
The market is closely tied to government policy. If inflation remains unchecked, we may see continued volatility in borrowing costs, which could hinder long-term growth.
The market’s momentum will depend on stabilising borrowing costs, ensuring that the supply remains sufficient. The government following through on their ambition to build 370,000 annually should support this.
The first quarter of 2025 is expected to bring a burst of activity, but analysts caution that the end of the stamp duty holiday could lead to a slowdown in the following months.
Related: What is a Professional Mortgage and Can You Get One?
How Can You Find an Affordable Mortgage in 2024?
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