British house price growth set to slow relative to growing rental demand

Created: 15 Sep 2022

With the impact of inflation, rising interest rates and thereby mortgage rates, UK house price growth is forecast to slow down going into 2023 on account of affordability concerns. As a new generation, Gen Z born between 1997 and 2012, enters the housing market, rental demand, which is already at record levels, is expected to grow further. 


House price growth is set to slow with Hamptons forecasting 150,000 less home purchases in 2023, at 1.1m compared to 2022 at 1.25m. This is representative of a 12 per cent decline, returning home purchasing levels to those of 2013. Meanwhile, rents are predicted to rise 5 per cent on an annualised basis through to 2024, before edging down to 4 per cent in 2025. 


Rightmove data shows that average national annual house growth is set to end the year 2022 at 7 per cent, whilst Hamptons predicts this will drop to 1 per cent in 2023 across the East Midlands, North West and North East; whilst falling to 0.5 per cent in the West Midlands and Yorkshire and the Humber. Even prime central London is forecast to have slower growth at 1.5 per cent annually next year. 


A key factor  impacting the house price growth is the Bank of England’s interest rate, which could peak at anywhere between 2.5 and 3.5 per cent this year. A bank rate beyond the 2.5 per cent level would drive mortgage rates up past the 5 per cent level, hampering house prices. Therefore, a new generation entering the housing market will likely opt to rent a home in the absence of affordable mortgage access. 


Further, the Help to Buy government scheme is finally coming to an end in October, driving the pursuit of commuter belt towns and built to rent developments, which will reduce pressures on household incomes going into a potentially recessionary period. As such, Hamptons forecasts that 2024 will offer some recovery, with 2025 signifying the start of a new economic cycle at a 1.75 per cent base rate and 3 per cent annual house price growth. 


Over the next four years, Hamptons said it expects prime central London to experience the strongest price growth, with the East of England and the South East following behind, as more flexible working patterns tie prices in the regions more closely together. Despite affordability issues for tenants, Hamptons said it expects rental growth to outperform house price growth over the next four years, reflecting “the increasingly high-cost environment faced by landlords”.