When predicting the property market, surprises are always waiting around the corner. Just when you think you’ve got it all figured out, the landscape shifts, and what seemed obvious six months ago no longer holds true. 2024 certainly kept us on our toes, and as we move into 2025, it’s clear that investors, homeowners, and developers alike need to stay sharp and ready to adapt.
We’ve seen plenty of movement already—stock levels are rising, ex-rentals are flooding the market, and sellers are scrambling to beat upcoming stamp duty changes. But what does it all mean for property prices, mortgage lending, and where the real opportunities lie? Let’s dig in.
We’ve started 2025 with plenty of stock hitting the market, continuing the trend of the second half of 2024, with more listings than in the past eight years, and most likely a long time before that. I am ascribing a decent amount of this to ex-rentals selling up. There will have been people putting off moving after Liz Truss and the Kami-Kwasi budget of late 2022 and avoiding the anaemic market of 2023.
These people also needed to see the evidence of the comparatively weak start to 2024 having been blown away. The forecasters did them no favours with their insanely bearish, inflation-blind predictions. They all got proved wrong, but many only turned remotely cheery around September 2024. If you haven’t got your finger on the pulse of the market, then you’d only have got the memo around now.
These same people would then have heard about the stamp duty changes coming on 1st April and thought, “Right, better get sold and try and buy then!” Anyone doing that now, or even in January, is hopelessly naive unless they are going into auction, or if they are cash sellers/buyers, of course (and if they will attract a cash buyer/no-chain offer for their own house). Most people suffer from over-optimism bias though. I just see the cliff edge and think the first few weeks of April will offer up opportunities in fall-throughs.
January’s auctions didn’t sell well, nor did the stock on offer set anything on fire. We were quiet. I expect February to oversell and March to underperform, but those are, of course, very broad-brush statements. I’m not seeing the same amount of trading opportunities across my desk as I did at the back end of 2024. It is nothing like the panic sale of September to October 2024. Although I knew that was never going to last, it was a compressed period of panic before the budget. That didn’t really affect property at all, but it affected everyone’s estate planning, of course, alongside whatever other business interests you might have.
Right, so, roaring capital growth expected? Not by me. I am at 3.75% growth for the year. It’s subdued because I see unemployment increasing as a given, with low economic growth and confidence. Let me just state, I’d be delighted to be wrong (as long as that’s on the upside). I truly believe we are well below the long-run trend in house prices, whether you want to adjust for inflation, wages, or something else. This is just a 12-month snapshot. However, there must be a very big caveat here because of what’s in the pipeline.
Let me tell you more. Around Christmas, Sir Keir and Rachel Reeves snuck out the idea of asking the regulatory bodies (of which there are many) for some ideas on how to boost growth and cut regulations. There were analogies (I was also guilty here) of turkeys voting for Christmas. You can understand it. “Please come up with some ideas that will shrink the size, power, and budget of your organisation.” Oh sure. But, of course, it depends on how it is framed. For example, “Either you do it, or I appoint someone to do it. The latter will be more brutal, of course.” That’s probably how I’d frame it.
This includes, amongst said sea of regulations that make progress, growth, and the likes slower than any of us would like them to be, regulations around mortgage lending. Fire up the band... and you might already be getting flashbacks to The Big Short, if you, like me, are a big fan of the film. (If you haven’t seen it, you must watch it or read the book, or both.)
What are those regulations currently? Well, in the interests of brevity, let’s summarise ASAP. Affordability assessments include income, expenditure, and stress testing. This last piece is a big bugbear of mine, with the stress test often being applied at an 8% pay rate.
This is highly, highly unlikely. I never like saying never, but I base this on a few things. Firstly, we can barely afford a 5% gilt rate without having to explore significant “options” as a country. Some remain convinced that the IMF bailout is “coming” (I’m not on that bus).
Secondly, when the Bank of England discussed a 6% base rate (as someone who attends the quarterly regional briefings, I’m a pain in the backside to the regional rep with my questions), the message I received in a thinly veiled way was: “No chance.”
The Bank won’t publish a “top” figure because who knows what you might have to do to react to a crisis. But please remember, the majority of realistic worst-case scenarios see rates going down drastically, not up.
A gigantic inflationary supply shock is the only one that would break rates through the upper-stress barrier—and it would have to be intergalactic. A hot war that the UK was very actively involved in against their will, defending the nation—something like that. Sanctions against the UK. Unthinkable chains of events.
This doesn’t strike me as a sensible way to operate a stress test scenario. The margin between current rates and the stress rate is incorrect. That’s another way to look at it. If we assessed a “normal” interest rate and did a proper job, then in 2012 (when the current rules were brought into place), the suggestion of a 5.5% stress rate looked fair. It matched the top of the five-year gilt yield for the past decade (or thereabouts).
Now, the top of the five-year gilt over the past decade is 5%. The current draw rate is around 4.7%, so we are near that top. Just going with 5% (or 5.5%) would be extremely irresponsible. However, 8% is arbitrary and unnecessarily restrictive. It wouldn’t take a rocket scientist to come up with a number. Frankly, the Bank of England could do it in a week. No one would like that approach—it would appear a bit slapdash, I’m sure—but even within the wheels of necessary governance, eight weeks would be plenty, even overkill.
That number is likely between 6.5% and 7% as a fair stress rate. We haven’t seen over 6% in any meaningful way since 1997. The world was different then, and the GDP growth rate was also very different. The interest rate was, overall, just more buoyant. Since inflation targeting, an independent central bank, and globalisation in general—and post-industrialism, if we want to get into that—6% is fine. 6.5% gives breathing room. 7% is for those with a nervy disposition. 8% is lazy, nonsensical, and applying a “fake” margin of safety that just doesn’t need to be there.
The stress test, make no mistake, protected us when we went from 0% yields in February 2021 to 5% yields in October 2022. That was not a long time frame at all to do that in—a genuine shock for the ages, frankly. We survived it. We don’t need to worry about going to 8%. We have far more realistic scenarios to consider. It’s why the market didn’t melt down.
However, keeping an artificial lid on it is nonsensical. Anyway, enough on the stress test. Then we have the limits on how many loans can be over 4.5 times income and also over 90% LTV. Those lids could also be lifted, at the lender level, with some safety, and also nice and slowly. Some lenders go up to six times income at 95% LTV (Nationwide), and some offered 100% lending (Skipton) briefly, but this is sure to come back. With guarantors, it is all possible. The current rules are that only 15% of a lender’s new loan book can be above 4.5x income.
Where could this go? Well, there’s the simple lifting of the lid on the LTIs, combined with my suggested approach to the stress tests. That could help a lot. What more could be done? Charges or interweaving equity release for the “Bank of Mum and Dad” to intertwine their estate planning with helping the kids onto the property ladder. Unencumbered property? 55+? Multiple children? Get an arrangement ready to draw down when each one needs a leg up of £50k or equivalent, perhaps growing as house prices grow, and mitigate inheritance tax liability at the same time. It only works for a percentage, of course, although I see inheritance tax thresholds stuck at the point where the average house will soon have more than 10% of people within scope, once their pensions are also taken into account… (currently around 4.5%).
Keep Calm and Carry On
So what? What does all this mean? Well, depending on the outcome of the conversations going on, house prices will rise—more than they have been. NOTHING moves prices up more than credit expansion—that’s what happened in the early 2000s. What will be needed is skill in ensuring it isn’t an unsustainable bubble, but a nice, orderly, sustainable rise. This stuff is happening, and it’s happening with political wisdom behind it—nothing wins an election like rising house prices. It really is as simple as that.
A great reason to—as always—Keep Calm and Carry On (buying property!). Until next time!
LinkedIn: Adam Lawrence
