Approaching certainty: Four explanations for imminent plummeting of British property values
The UK housing market, which has remained buoyant since the early 1990s, is showing signs of a potential correction in 2025. The average house price in the UK has risen to an astounding £270,000 this year, more than doubling, when adjusted for inflation, since 1990 when the average house price was £58,000.
However, the economic landscape of the UK is shifting, with the economy showing signs of stagnation and potential recession. The deficit is running at more than 5% of GDP, and attempts to reduce it face opposition. Higher taxes are hitting the economy so hard that they bring in very little revenue.
These economic challenges are contributing to the potential house price crash. The key factors include:
- Economic slowdown and recession risks: UK GDP has recently fallen, and expectations of continued decline are causing concern. Business closures, rising taxes, and increased operating costs, such as Europe's highest electricity prices, have led to job losses and reduced consumer spending power, diminishing demand for housing.
- Tax hikes on landlords and second-home owners: The government has increased taxes on landlords and imposed higher council taxes on second homes, often doubling or tripling the rate. These changes, coupled with extended renters' rights making it harder to repossess properties, have pushed many landlords and secondary property owners to sell, flooding the market with supply.
- Higher mortgage and borrowing costs: Despite some recent drops in interest rates, the period of high rates during 2023 curtailed affordability. Rising mortgage costs reduce the number of potential buyers, squeezing demand, especially first-time buyers.
- Market distortions due to policy changes: New stamp duty rules from the October 2024 budget, including a hike in additional stamp duty for investors from 3% to 5%, caused transactional surges ahead of deadlines followed by sharp falls in activity. This creates uncertainty and volatility that can depress prices.
- Supply and demand imbalances: As affordability worsens, buyers shift from expensive regions toward more affordable urban areas, reducing demand in pricier zones and further pressuring prices downward. At the same time, landlords exiting the market increase supply, contributing to price adjustments.
These factors—economic strain, increased taxation on property investors, tighter borrowing conditions, and policy-driven market distortions—are driving downward pressure on UK house prices. However, some experts note that a major crash is not guaranteed in the near term, as underlying supply constraints still support the market to some extent.
Additional pressures on the UK housing market include the Bank of England potentially pushing up interest rates, which could trigger a collapse in house prices. The property market may also be affected by the introduction of water metering, meaning higher bills for those with bigger properties and gardens, and rising energy bills to cover the cost of the switch to renewable power.
The UK government's decision to extend renters' rights, making it harder for landlords to take back their properties, and the imposition of extra taxes on second homes are also contributing to the exodus of landlords from the sector. The UK's failure to build enough homes to meet its population growth is another issue that could exacerbate the housing crisis.
Despite these challenges, a home in the UK has been considered the best investment since the early 1990s. However, the current economic environment and housing market dynamics suggest that this trend may be changing, with a potential correction in 2025 on the horizon.
- The potential correction in the UK housing market in 2025 might be influenced by the increased interest rates set by the Bank of England, which could lead to a collapse in house prices.
- Moreover, the UK property market may be affected by the introduction of water metering, as it could result in higher bills for large property owners, reducing their ability to invest in real estate.
- In terms of personal finance, the economic challenges in the UK, such as higher taxes, stagnating economy, and potential recession, could impact investing, making it more difficult for individuals to finance their business or real-estate ventures.
- Tariffs imposed on second homes and increased taxes on landlords, along with extended renters' rights making it harder for them to repossess properties, are driving landlords away from the sector, potentially leading to a shortage of rental units and further increases in personal-finance pressures on renters.
