Knight Frank cuts 2025 house price forecasts as market faces adjustment

Knight Frank's decision to revise its house price forecasts downwards for the near term whilst maintaining optimism for the medium term reflects a property market grappling with elevated mortgage rates and economic uncertainty. The consultancy's latest assessment acknowledges that the aggressive interest rate environment has fundamentally altered buyer behaviour, forcing a recalibration of price expectations that savvy investors have already begun to incorporate into their strategies. This forecast adjustment carries significant implications for portfolio planning, particularly as the gap between short-term market realities and longer-term housing fundamentals continues to widen.

The revision comes against a backdrop of mortgage rates remaining stubbornly above 5% for many borrowers, a level that has effectively priced out substantial numbers of potential buyers from regional markets including Manchester, Birmingham, and Leeds. Data from recent months shows transaction volumes down approximately 15-20% year-on-year in these key investment hubs, with first-time buyer activity particularly subdued. Knight Frank's more cautious near-term outlook recognises that current affordability constraints are likely to persist through the first half of 2025, creating a buyer's market in many previously competitive locations.

For buy-to-let investors, this forecast divergence presents both challenge and opportunity. The softer near-term price environment suggests acquisition opportunities will emerge, particularly in markets where leveraged investors are forced to sell due to refinancing pressures. Northern cities such as Liverpool and Newcastle, where rental yields have remained more attractive relative to purchase prices, stand to benefit from this dynamic. Experienced landlords with strong cash positions are positioning themselves to capitalise on distressed sales, particularly in the sub-£300,000 segment where mortgage affordability constraints bite hardest.

The commercial property implications of Knight Frank's revised outlook extend beyond simple price adjustments. Developers are already responding by delaying new residential schemes, particularly in markets where pre-sales have stalled. This supply constraint will likely underpin Knight Frank's more optimistic medium-term view, as housing delivery continues to lag demographic demand by significant margins. Major development sites around Manchester, Birmingham, and outer London are experiencing extended planning phases as builders wait for clearer market signals.

Regional market dynamics are diverging sharply in response to these conditions. Prime London markets, where Knight Frank maintains particular expertise, face different pressures from mainstream regional markets. International buyer activity remains subdued due to stamp duty surcharges and currency considerations, whilst domestic upgraders are constrained by mortgage market conditions. Conversely, markets in Surrey and other commuter locations are seeing selective strength in sub-markets where buyers can access competitive fixed-rate products.

The rental market emerges as a clear beneficiary of Knight Frank's scenario. Softer house prices combined with continued mortgage market constraints will extend rental demand beyond its typical demographic base. Professional couples in their thirties who would traditionally transition to homeownership are remaining in the rental sector longer, supporting rental growth in city centre locations. This trend particularly benefits purpose-built rental developments in Manchester, Birmingham, and Leeds, where institutional investors have concentrated their efforts.

Knight Frank's forecast framework suggests the property market is entering a transitional phase that will separate sophisticated investors from those relying on momentum-driven strategies. The consultancy's emphasis on medium-term fundamentals over near-term price movements reflects underlying housing supply constraints that remain unresolved. Investors who can navigate the current affordability crisis whilst positioning for the eventual return of normal mortgage market conditions will capture the greatest value from this market adjustment. The key determinant of timing will be the Bank of England's rate trajectory, but housing market fundamentals suggest any significant easing will quickly translate into renewed price momentum.