Investment bank Peel Hunt has explored three potential scenarios for the UK’s housing market next year, looking at how different macroeconomic paths could shape house prices and housebuilder profits.

The research explores upside, central and downside scenarios. Under the upside scenario, housebuilders’ net income is predicted to rise 36%, with margins recovering and return on equity hitting 10.5%. Gleeson, Crest Nicolson and Bellway would see the greatest uplifts, Peel Hunt said.

The upside scenario predicts a 4.2% rise in house prices this year and a 6.3% rise next year, with healthy improvements in factors driving demand including mortgage approvals, wage growth and employment.

Peel Hunt’s central scenario predicts that housing supply and mortgage approvals will return to pre-pandemic averages, with a 7.7% average return on equity and housebuilders trading at around 0.95x 2026 price to tangible net asset value.

Under this scenario, Barratt Redrow, Berkeley Group, Persimmon and Taylor Wimpey are predicted to generate group operating profits of £777m, £450m, £492m and £517m respectively in 2026, while Bellway, Crest Nicolson and Gleeson would make operating profits of around £354m, £59m and £36m respectively.

Finally, in its downside scenario, Peel Hunt predicts prices will fall 0.8% this year and 0.2% in 2026.

In this scenario, housing supply, mortgage approvals and consumer confidence would fall to levels seen during “crisis periods” such as 2011. Net income would drop 58% and return on equity would fall below 3%.

Under the downside scenario, Peel Hunt suggests Barratt Redrow, Berkeley Group, Persimmon and Taylor Wimpey would make operating profits of £280m, £253m, £232m and £229m, respectively, compared with upside scenario profits of £1.09bn, £574m, £654m and £698m, respectively.

Most heavily hit in the downside scenario would be Bellway, Crest Nicolson and Gleeson, with profits of £118m, £10m and £4m respectively, compared to upside scenario profits of £502m, £90m and £56m, respectively.

The research note, put together by chief economist Kallum Pickering, deputy head of research Clyde Lewis and analyst Sam Cullen, said changes in house price growth would have implications for the wider economy, but the most “immediate impacts would be felt by housebuilders”.