The Office for Budget Responsibility has increased forecasts for both house prices and future mortgage rates compared to 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 percent in 2024 to a peak of 4.5 percent in 2027, before to stay around that level until the end. of the prediction.
It says: “Compared to our March forecast, mortgage rates are on average about 0.3 percentage points higher than forecast, driven by our higher bank rate forecast.”
Bank of England base rate forecasts
“From the current level of 5 percent, the bank rate is expected to fall to 3.5 percent in the last year of the forecast. [2030].
“Over 2025 and 2026, this is about half a percentage point higher than the level of the bank rate in our March forecast.”
The OBR further says the differences are partly due to changing circumstances since March and a shifting market consensus.
But it suggests the Chancellor has gone further in some measures than markets might have expected.
It says: “However, it is unlikely that market participants have anticipated the full extent of discretionary fiscal easing in this Budget at this point. That is why we have increased the interest rate on bank interest and government bonds by a quarter of a percentage point according to the forecast.”
The housing market
The OBR says: “In our central forecast, we expect house price growth to fall slightly from 1.7 per cent in 2024 to 1.1 per cent in 2025 as average effective mortgage rates continue to rise.
“House price growth will then average around 2.5 percent from 2026 to the end of the forecast [2030] supported by nominal profit growth.
“Housing prices rose by around 3 percent in the first half of the year, meaning the average house price in mid-2024 was around 3 percent higher than our March forecast.
“Average house prices remain above our March forecast throughout, driven by recent resilience and our forecast for higher nominal incomes.
“This would put the average house price in Britain at £310,000 by 2028, around 2.5 per cent higher than our March forecast.”
The OBR predicts that property transactions will increase from around 275,000 per quarter in 2024 to around 350,000 per quarter over the five-year forecast period.
It says: “We expect the number of new homes, a leading indicator of net additions to housing stock, to gradually pick up from a ten-year low of around 100,000 in 2024, reaching around 160,000 in 2029.
“Cumulative against forecast, net additions amount to approximately 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.