"Positive news from the Budget is there’s confidence that house prices are on a healthy trajectory, and we’re moving on from that boom/bust cycle we saw during the pandemic."
- Jonathan Stinton, head of mortgage relations at Coventry BS
The Office for Budget Responsibility (OBR) has outlined its forecasts for house prices, inflation, mortgage rates and interest rates following yesterday's Budget.
House prices
House prices are expected to rise by 15% over the forecasted period from 2024-2030, according to the OBR.
In its central forecast, published following yesterday's Budget, the OBR predicts that house price growth will fall back slightly from 1.7% in 2024 to 1.1% in 2025, as the average mortgage rate continues to rise. House price growth then averages around 2.5% from 2026 until the end of the forecast, supported by nominal earnings growth.
House prices have risen by around 3% in the first half of the year, around 3% higher than the OBR's March forecast in mid-2024 and average house prices remain above its March forecast throughout. This would leave the average house price in the UK at £310,000 in 2028, around 2.5% higher than its March forecast.
CPI inflation
Having fallen back to around the 2% target in mid-2024, the OBR expects CPI inflation to pick up to 2.6% in 2025, partly due to the direct and indirect impact of Budget measures. Inflation then slowly returns to the 2% target by the forecast horizon.
In its forecasts, the OBR predicts inflation of 2.5% this year, 2.6% in 2025, 2.3% in 2026, 2.1% in 2027 and 2028, returning to the 2% target by 2029.
For UK GDP, the OBR is now expecting growth of 1.1% this year, 2% in 2025, 1.8% in 2026, 1.5% in 2026 and 2028, and 1.6% in 2029.
Bank Rate
From its current level of 5%, Bank Rate is expected to fall to 3.5% in the final year of the forecast.
Over 2025 and 2026, this is around half a percentage point higher than the level of Bank Rate in the OBR's March forecast, "partly reflecting market expectations at the time we closed our pre-measures interest rate forecast on 12 September".
The OBR said: "The substantial fiscal easing in this Budget, boosting demand and borrowing, was not likely to have been fully anticipated by market participants at this time". It has therefore raised Bank Rate and gilt yields by a quarter percentage point across the forecast.
The OBR says market expectations for interest rates remain volatile, with expectations for Bank Rate in 2025 varying between 3.6 and 4.7%, "underscoring the continued uncertainty around the monetary policy outlook".
Mortgage rates
Average interest rates on the stock of mortgages are expected to rise from around 3.7% in 2024 to a peak of 4.5% in 2027, then remain around that level until the end of the forecast.
The high proportion of fixed rate mortgages (around 85%) means increases in Bank Rate feed through slowly to the stock of mortgages. Bank of England analysis shows around two-thirds of fixed rate mortgages have been repriced since the start of this hiking cycle, and they expect the remainder to expire by the end of 2026. Compared to the OBR's March forecast, mortgage rates are around 0.3 percentage points higher on average over the forecast, driven by its higher forecast for Bank Rate.
Jonathan Stinton, head of mortgage relations at Coventry Building Society, said: “Positive news from the Budget is there’s confidence that house prices are on a healthy trajectory, and we’re moving on from that boom/bust cycle we saw during the pandemic. It’s a glimmer of positivity from the OBR, with their forecast signalling the overall strength and resilience of the housing market.
“Buyers and sellers should be reassured that the medium-term outlook is positive, with a reduced risk of sudden price drops, and a greater chance of stability and steady growth in the market.”
