Knight Frank has revised its house price forecasts and said it now expects average values to rise this year rather than fall.

A new forecast from the agency and property brand has become more positive over the last three months as interest rate expectations have changed markedly.

Tom Bill, head of UK residential research at Knight Frank, said the brand now expects mainstream house prices to rise 3% this year rather than the 4% drop it previously predicted.

Bill said: “In October, financial markets were pricing in a single interest rate cut of 0.25% by the end of 2024. By the end of last week, they were expecting five.

“The main reason for this changing outlook is that inflation is falling faster than expected. As a result, mortgage lenders have dropped their rates fairly significantly in recent weeks, partly to win business in a low-volume market.

“The best five-year fixed-rate mortgage is now under 4%, which was made possible after the five-year swap rate fell a full percentage point over the final quarter of 2023.”

With low-level single-digit growth in subsequent years, Knight Frank said it now expects cumulative growth of 20.5% in the five years to 2028.

The agent is still forecasting slightly lower growth for the mainstream London market, up 2% this year, citing “continued affordability constraints in the capital,” meaning lower-value areas of the country are likely to outperform.

In the prime country house market, Knight Frank is expecting a narrower 2% decline and it expects prime central and outer London to outperform the wider UK market.

However, Bill added that the continuation of the momentum in the housing market will depend on when the General Election takes place this year.

He said: “There is a risk that Rishi Sunak can’t fully control the timing if ideological splits within his own party on the issue of immigration grow wider, which adds an element of uncertainty. Speculation over the stability of the government is not good for sentiment in the housing market, as we saw in 2019 under former PM Theresa May.

“The ongoing conflict in the Red Sea and the threat it potentially poses for higher UK inflation is another risk on the horizon.

“On the plus side, activity could be boosted further by pre-election giveaways in the March Budget. “There is speculation surrounding tax cuts as well as measures to help first-time buyers including longer fixed-term mortgages, smaller deposits, and a revived help-to-buy scheme.”

Bill said a Labour victory appears the most likely election outcome and while it has ruled out introducing rent controls or a wealth tax, other measures could dampen demand in prime property markets.

He added: “These proposals include overhauling the non-dom tax regime, increasing the 2% stamp duty surcharge for overseas buyers, adding VAT to school fees, and changing inheritance tax rules.”

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