The UK housing market has faced its fair share of challenges in recent years, with high inflation and soaring mortgage rates putting a damper on many people’s dreams of buying a home. However, the latest forecast from the EY ITEM Club, a respected economic forecasting group, brings a glimmer of hope. They predict a significant upturn in mortgage lending growth, projecting a jump to 3.2% in 2025, more than doubling the modest 1.5% growth expected this year.
Despite recent improvements, including five consecutive months of rising mortgage approvals up to February, the housing market continues to struggle under the weight of high inflation and elevated mortgage rates. These factors have cooled demand and have kept house prices from rising too quickly.
The EY ITEM Club’s report paints a brighter picture for the near future. They forecast that mortgage lending growth will rise to 3.2% in 2025 and slightly less at 3% in 2026. This anticipated growth is linked directly to a predicted fall in inflation, which should enhance household spending power. Moreover, the Bank of England is expected to reduce its base rate to 4.5% by the end of this year, further helping to alleviate the financial strain on borrowers.
Broader Economic Outlook
The economic climate has been tough not only for homebuyers but also for UK businesses. Business lending saw a contraction of 2.1% in 2023. While a small recovery is expected this year with a growth of 0.5%, it’s a slow start. High interest rates and ongoing economic uncertainties are the main culprits hampering business sentiment. However, by 2025 and 2026, business lending is expected to pick up significantly, with projected growths of 2.8% and 3.4% respectively. This increase will likely be driven by the need for businesses to invest in new technologies, including digitalisation and artificial intelligence.
Financial Sector Forecasts
The financial sector is also set for varied performance in the coming years. The EY ITEM Club report forecasts that total UK bank loan growth will mirror the mortgage trend, with a slight growth of 1.7% in 2024 and jumping to 3.2% in both 2025 and 2026. For UK insurers, premium income growth is expected to normalise to 7% this year after an 8.7% rise in 2023, with future years seeing a gradual decline in growth rates.
Furthermore, assets under management are predicted to grow by 3.1% this year, slightly down from 3.4% in 2023. This slight decrease is due to investors already anticipating global interest rate cuts. However, a resurgence is expected in 2025 with a growth prediction of 5.6%, followed by a dip to 4.3% in 2026 as growth rates stabilise.
Caution Amid Optimism
Despite the optimistic forecasts, there are notes of caution. Anna Anthony, UK Financial Services Managing Partner at EY, warns that uncertainties related to elections in the UK and the US, along with rising geopolitical tensions in the Middle East and Ukraine, pose significant risks. Additionally, Dan Cooper, UK Head of Banking and Capital Markets at EY, points out the challenging macroeconomic environment, noting that inflationary pressures are starting to ease but high borrowing costs are still affecting customer demand for loans.