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What will shape UK residential returns over the next five years? From inflation and interest rates to planning reforms, mortgage flexibility, and rental legislation, Lucian Cook explains the forces redefining housing markets and investor strategies.
Landmark moments in the residential market
2025 heralded a number of landmark events which, alongside the general economic backdrop, are set to shape the returns generated from different parts of the residential market over the next five years.
Economic environment
On the economic front, inflation, which started the year at 2.5%, stood at 3.2% in November. And so, while rates were cut in December to stimulate a fairly stagnant economy, this has meant some of the interest rate cuts pencilled in for 2026 have been pushed out to later years. Consequently, we have downgraded our mainstream house price growth expectations for this year to just +2.0%.
Over the medium term, the outlook seems brighter, particularly in late-cycle housing markets beyond London and the South.
Mortgage milestones
This five-year outlook for average growth of 22% is supported by the greater latitude given to lenders in how they apply mortgage regulations, following revised guidance from the FCA in March of 2025.
Though, on the face of it, while this does not have quite the same milestone status as some of the legislative changes around planning, taxation and residential lettings, it does open up capacity for more lending at high loan-to-income and loan-to-value ratios, widening the range of buyers and their purchasing power when sentiment improves.
Housebuilding hopes
This backdrop has real implications for the housebuilding sector. Despite a more relaxed planning environment across England and the promise of further improvements as the pivotal Planning and Infrastructure Bill edges closer to receiving Royal Assent, developers of all shapes and sizes have struggled to take advantage of this positive planning environment in the face of weaker sales demand.
There was nothing of substance in the Autumn Budget to suggest that this will materially change this year. But if, as the omens suggest, we return to stronger price growth and increased sales activity from 2027, we are likely to see the brakes gradually come off and housebuilders’ appetite for land to grow.
Just as important, falls in interest rates and gilt yields will be crucial in restoring institutional demand for new Build to Rent product so that the returns again look competitive compared to other classes (more of which here).
Housing Associations are also likely to return to the land market as the new Social and Affordable Homes Programme grant funding will be allocated from mid-2026. Minds will be focussed by the need to acquire schemes that can complete by April 2029, creating a short window for buying land.
Designs on development
In the short term, the return of mandatory housing targets means those holding strategic land will have a good opportunity to secure the planning which unlocks its development potential. But uncertainties remain regarding what government will seek to extract via land value capture, whether through developer contribution agreements or other avenues.
How much to demand without locking up the land market remains a riddle which government is finding difficult to solve. But we must hope lessons have been learnt from London, where onerous affordable housing requirements have now been eased in an attempt to revive an ailing residential development market.
Rental reform
The other landmark legislative change of 2025 was the Renters’ Rights Act, the single biggest change in residential landlord and tenant law since the Housing Act 1988.
Its predecessor, the Renters’ Reform Bill, was first laid before Parliament in May 2023. And so, a recalibration in the balance of power between landlords and tenants has shaped our thinking on the outlook for the residential investment market for over two and a half years.
The provisions are likely to be most easily digested by larger, wealthier landlords who are best placed to deal with an additional regulatory burden and spread their risk across a wider portfolio of properties. A further wave of sales by smaller, more indebted landlords is likely to follow. Some of those properties will be bought by first-time buyers, while others — which meet larger landlords’ prescriptive minimum return expectations — will stay within the sector.
However, there is little to suggest that the sector will remain anything other than undersupplied, especially given the additional income tax rate on investment income introduced by Rachel Reeves. This is likely to underpin expectations for future rental growth.
Prime peculiarities
2025 will also be remembered as a year of unprecedented Budget speculation.
Much of that focussed on the top end of the market, with much talk of mansion taxes. On 26 November, Rachel Reeves unveiled new surcharges for properties over £2 million to sit alongside council tax and counteract its regressive nature.
We still expect a bottom-up, rather than top-down, recovery
Lucian Cook, Head of Residential Research
Those charges came in towards the bottom of the range of fears and expectations which hung over the top end of the market in the run-up to the year’s main fiscal event. And, given the extensive valuation exercise that will be required in 2026, they will not apply until April 2028.
This has allowed buyers and sellers who put their plans on hold to re-enter the market and will give some breathing space for other homeowners to assess what it means for them. However, we still expect a bottom-up, rather than top-down, recovery.