Better affordability puts UK housing market on firmer footing
The UK’s valuation gap has shrunk, but slowing pay growth limits further affordability gains.
Our new home buyer affordability index indicates that whereas house prices were 33% overvalued in Q4 2022, the valuation gap has receded to only 4% now.
This means the recent pickups in UK mortgage activity and house prices is likely due to a substantial improvement in housing affordability over the past three years.
However, we think the big improvements in affordability are now behind us. Pay growth is slowing, and financial market pricing already anticipates further rate cuts, suggesting limited room for swap rates and mortgage rates to fall from their current levels.
With supply still tight, we forecast a steady increase in house price inflation over the next few years. However, with further affordability gains expected to be modest, mortgage activity is likely to plateau from early 2026 at levels similar to those seen before the pandemic.
