Average UK house prices are expected to fall by 2% in 2026 as higher mortgage rates reduce demand, according to Savills’ revised housing forecast.
The firm says the conflict in Iran and the resultant rise in mortgage rates has "fundamentally changed the outlook for the UK housing market".
A significant increase in inflation has meant that households are facing higher mortgage costs and reduced availability of debt. As a result, Savills has revised its forecast for 2026 down from +2% to -2%.
The main risk to this outlook is that a more protracted conflict in West Asia leads to a sharper rise in inflation and, in turn, interest rates. Savills expects this would result in a more significant short term pressure on house prices, followed by a more pronounced V shaped recovery.
However, it believes there remains good capacity for house price growth in the medium term, as economic prospects are expected to improve and the market becomes less constrained by affordability.
Savills forecasts 18.5% growth over the five-year period to 2030 (downgraded from previous forecast of 22.2%).
The property firm expects recovery to begin slowly in 2027, before an improved outlook allows prices to grow more strongly over the remainder of the forecast period.
The North of England, Scotland and Wales are expected to outperform during the period of higher mortgage rates, reflecting their stronger affordability cushion. Further South, Savills anticipates houses will outperform flats, amid continued caution from buyers around leasehold and building safety concerns.
Lucian Cook, head of residential research at Savills, commented: “Despite a robust start to the year for both price growth and activity, the rise in mortgage rates since late February has downgraded the short-term outlook. Higher borrowing costs and weaker sentiment will weigh on demand through the remainder of 2026.
“At the same time, lower demand is being set against elevated levels of stock – partially from landlords selling up in the face of greater regulation, which will place downward pressure on prices, particularly across submarkets in London and the South East.
“However, several factors will cushion the impact of these headwinds. Affordability is less stretched now, compared with 2022, following a slower recovery in prices. While stricter mortgage regulation and the widespread use of fixed-rate mortgages continue to keep the risk of forced sales low. Overall, this points to a modest adjustment in nominal house prices, with the greatest pressure likely to come over the summer as interest rates peak.”
Dan Hill, research analyst at Savills, added: “Regional performance continues to be shaped by affordability. More affordable markets tend to be more resilient when borrowing costs rise, and we expect that to underpin outperformance across parts of the North, Scotland and Wales while mortgage rates remain elevated."
