Knight Frank forecasts house prices will rise by 3% in 2024, an upward revision from three months ago when the estate agent predicted they would fall by 4% this year, due to expectations that interest rates will decline “markedly”.  

“The outlook has become more positive over the last three months as interest rate expectations have changed markedly,” says Knight Frank head of UK residential research Tom Bill in a note.  

The firm says in October, financial markets were pricing in a single interest rate cut of 25 basis points by the end of 2024. At the end of last week, they were expecting five.  

UK inflation is currently 3.9%, falling from 10.1% last January, as energy, food and other costs have eased.   

The Bank of England interest rate is 5.25%, a 15-year high, but was held for the third time in a row in November, as the central bank combats inflation.  

Bill says the main reason for the firm’s “changing outlook is that inflation is falling faster than expected. As a result, mortgage lenders have dropped their rates fairly significantly in recent weeks, partly to win business in a low-volume market.  

“The best five-year fixed-rate mortgage is now under 4%, which was made possible after the five-year swap rate fell a full percentage point over the final quarter of 2023.”  

The agent says that although UK housing transactions were a fifth below their five-year average last year, “mortgage approvals were 10% higher in November than the previous year and we expect a double-digit percentage increase in sales volumes this year compared to 2023”.  

However, house price momentum could be upset by the General Election, expected this year.  

Bill says: “There is a risk that Prime Minister Rishi Sunak can’t fully control the timing if ideological splits within his own party on the issue of immigration grow wider, which adds an element of uncertainty.   

“Speculation over the stability of the government is not good for sentiment in the housing market, as we saw in 2019 under former Prime Minister Theresa May.  

He adds: “The ongoing conflict in the Red Sea and the threat it potentially poses for higher UK inflation is another risk on the horizon.”  

But Bill points out: “On the plus side, activity could be boosted further by pre-election giveaways in the March Budget.   

“There is speculation surrounding tax cuts as well as measures to help first-time buyers including longer fixed-term mortgages, smaller deposits, and a revived help-to-buy scheme.”  

Bill says a Labour election victory “appears the most likely outcome” and while the opposition has ruled out introducing rent controls or a wealth tax, “other measures could dampen demand in prime property markets”.  

He adds: “These proposals include overhauling the non-dom tax regime, increasing the 2% stamp duty surcharge for overseas buyers, adding VAT to school fees, and changing inheritance tax rules.”  

The firm has not changed its expectations for rents this year, maintaining a 5% growth forecast.  

Bill says: “Rising mortgage costs, taxes and red tape — including the Renters Reform Bill — should maintain upward pressure on rents this year by keeping supply in check.”