After a period in which the British housing market seemed to do nothing but stall, activity has returned. Transaction volumes have recovered, prices are drifting modestly higher in most regions and rents continue to climb faster than earnings. The recovery, however, conceals a market that is increasingly divided.
The shape of the market
Nationally, house prices have risen gently over the past year, with the strongest growth outside the south east. Official indices have shown annual growth in the low single digits, a figure that flatters some regions and understates pressure in others.
The more important number is not the price but the distribution of mortgage debt. A large share of existing owners fixed their borrowing at rates that now look historic, most of them before the tightening cycle that began in 2022. Those households are insulated from current market rates. Everyone else, and particularly first-time buyers, is not.
Mortgage rates and affordability
Mortgage pricing tracks expectations for the Bank of England's policy rate rather than the rate itself. When markets expect cuts, fixed rates fall in advance. That has produced a market in which borrowing costs are meaningfully lower than their peak but still far above the levels that shaped house prices a decade ago.
The practical effect is arithmetic. A buyer borrowing a given sum today pays substantially more each month than the same buyer would have paid in 2021, even with prices barely changed. Affordability, not sentiment, is the binding constraint on the market. That is why activity is strongest among cash buyers, downsizers and those with substantial equity, and weakest among first-time buyers without family support.
Why so little gets built
The supply side remains the intractable problem. England has consistently delivered fewer homes than the government's own targets, and the shortfall is cumulative.
The reasons are well documented. The planning system is slow, discretionary and locally contested. Builders manage the pace of sales to protect margins, which means land with permission is not always land that is built on. Skilled trades are in short supply and materials costs have proved sticky. Large parts of the country, particularly in the south east, are constrained by green belt designations that limit where development can occur at all.
Reform has been attempted and is being attempted again, with changes to housing targets and to the rules that govern how councils allocate land. These take years to appear in completions, and local political resistance is intense.
The rental market
The rental market tells a harsher story. Rents have grown considerably faster than wages for several years, driven by strong demand, a shrinking pool of landlords and a shortage of stock.
Higher borrowing costs, tax changes and increased regulation have reduced the attractiveness of buy-to-let, and some landlords have sold. The tenants displaced by those sales do not disappear. They compete for what remains. Official statistics have recorded rents rising at rates well ahead of overall consumer price inflation.
Legislative change adds a further variable. Reforms to tenancy law aim to strengthen tenant security and are broadly popular, but the sector's economics remain sensitive to the cost of capital and to the burden of compliance.
Regional divergence
The national averages hide a widening gap. London and the south east remain the least affordable relative to local earnings, with price-to-income ratios that bear little relation to the rest of the country. Parts of the north and the Midlands offer materially better value, and demand has followed, helped by remote and hybrid working that has loosened the tie between home and office.
That shift is real, but it is slower and smaller than the commentary of the pandemic years suggested. Most people still live near their work.
Commercial property
The commercial market has followed its own cycle. Offices have repriced sharply, particularly older stock in secondary locations, as hybrid working reduced the amount of space tenants want. Warehouses and logistics assets have held up better. Retail has stabilised in some locations after years of decline, with the strongest sites attracting demand and weaker ones continuing to struggle.
The common thread is quality. Space that meets modern environmental and occupancy standards is in demand. Space that does not is becoming a liability for its owner.
Stamp duty and policy
Transaction taxes remain the most visible policy lever. Stamp duty land tax raises the cost of moving above set thresholds, and the structure creates sharp jumps in liability at the boundaries. Economists have long argued that it dampens mobility, discourages downsizing and distorts the market, though its revenue is significant and abolition is not currently on the table.
The more consequential policies are those governing supply: planning reform, funding for affordable housing and support for the construction workforce.
What happens next
The direction of the market over the next two years will be set by three variables: the path of interest rates, the pace of planning reform and the trajectory of real wages. If rates fall gently and earnings keep pace with prices, affordability improves at the margin and activity normalises. If rates stay higher for longer, the market continues to split between those insulated by cheap fixed debt and those exposed to current pricing.
The one thing that would change the picture decisively is supply. Until Britain builds closer to the number of homes it needs, prices and rents will keep being the mechanism that allocates scarcity.
