The Office for Budget Responsibility has increased forecasts for both house prices and future mortgage rates compared to its March predictions.
In its latest Economic and Fiscal Outlook, published today, the independent body says it expects average interest rates on outstanding mortgages to rise from around 3.7 per cent in 2024 to a peak of 4.5 per cent in 2027, then remain around that level until the end of the forecast.
It says: “Compared to our March forecast, mortgage rates are around 0.3 percentage points higher on average over the forecast, driven by our higher forecast for Bank Rate.”
Bank of England base rate predictions “From its current level of 5 per cent, Bank Rate is expected to fall to 3.5 per cent in the final year of the forecast [2030].
“Over 2025 and 2026, this is around half a percentage point higher than the level of Bank Rate in our March forecast.”
The OBR goes on to say that the differences are partly as a result of changing conditions since March and shifting market consensus.
But it suggests that the Chancellor has gone further than the markets may have expected in some measures.
It says: “However, the full extent of discretionary fiscal easing in this Budget is unlikely to have been anticipated by market participants at this time, so we have raised Bank Rate and gilt yields by a quarter percentage point across the forecast.”
The housing market
The OBR says: “In our central forecast, we expect house price growth to fall back slightly from 1.7 per cent in 2024 to 1.1 per cent in 2025, as the average effective mortgage rate continues to rise. “House price growth then averages around 2.5 per cent from 2026 until the end of the forecast [2030] supported by nominal earnings growth.
“House prices have risen by around 3 per cent in the first half of the year, such that the average house price was around 3 per cent higher than our March forecast in mid-2024.
“Average house prices remain above our March forecast throughout, driven by the recent resilience and ourforecast for higher nominal incomes.
“This would leave the average house price in the UK at £310,000 in 2028, around 2.5 per cent higher than our March forecast.”
The OBR predicts property transactions to rise from around 275,000 a quarter in 2024 to around 350,000 a quarter over its five-year forecast period.
It says: “We expect housing starts, a leading indicator of net additions to the housing stock, to gradually pick up from a decade-low of around 100,000 in 2024 to reach around 160,000 in 2029.
“Cumulatively over the forecast, net additions are around 1.3 million.”
However, the OBR also notes that the Government has proposed “significant changes” to the National Planning Policy Framework as part of wider reforms to the planning system, which could increase these numbers if the measures prove successful.
