The Office for Budget Responsibility (OBR) has increased its forecasts for house price and mortgage rate growth over the next five years.
Average interest rates on existing mortgages are expected to rise from around 3.7% this year to a peak of 4.5% in 2027, where they are forecast to remain until 2030, the OBR said in its Economic and Fiscal Outlook.
Compared to the OBR’s March forecast, mortgage rates are around 0.3 percentage points higher on average, driven by its higher forecast for the bank rate, which it has increased by around half a percentage point over 2025 and 2026 compared to its March forecast.
From its current level of 5%, the bank rate is now expected to fall to 3.5% in the final year of the forecast.
Around 85% of the stock of existing mortgages are on fixed deals, which means rate rises have been slow to feed through, said the OBR.
Bank of England analysis shows that around two-thirds of fixed rate mortgages have been repriced since the start of the interest rate hikes. They are expected to expire by the end of 2026.
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Meanwhile, house price growth is expected to fall back from 1.7% this year to 1.1% in 2025, before rising to around 2.5% from 2026 to the end of the forecast.
The OBR forecasts that property transactions will rise from around 275,000 per quarter in 2024 to around 350,000 per quarter over the forecast.
Property transactions rose by around 10% over the first half of 2024, eight percentage points higher than anticipated in the March forecast. However, transactions are expected to be marginally lower in the medium term, reflecting the OBR’s forecast for fewer net additions to the housing stock, which reduces supply.
Housing starts are expected to gradually pick up from a decade low of around 100,000 in 2024 to reach around 160,000 in 2029, taking total net additions to the housing stock over the next five years to 1.3 million, short of the government’s one-and-a-half million target.
