House prices will fall by two per cent this year – the most since the financial crisis

UK house prices are projected to fall by two per cent in 2026, marking the first annual decline since the financial crisis, according to Savills. The property firm revised its forecast downward after the Iran war forced mortgage lenders to withdraw deals at their fastest pace since Liz Truss’s mini-Budget, pushing two-year fixed mortgage rates up from 3.5 per cent to an average of 5.8 per cent. Higher borrowing costs and weaker market sentiment will weigh on demand, with London facing a four per cent price drop due to excess supply and elevated mortgage rates. Inflation is expected to remain at 3.9 per cent, reducing real house price growth to a near-six per cent decline nationwide and an eight per cent drop in London. Savills attributes the shift to mortgage re-rating, with the lowest two-year fixed rate now at 4.4 per cent, up from pre-war levels. The firm predicts the worst pressure will occur over the summer, when mortgage rates are highest, before prices begin recovering in 2027 with a 2.5 per cent rise. The decline follows a 1.4 per cent drop in 2023, when the Bank of England raised interest rates by five per cent in under two years after Russia’s invasion of Ukraine. Landlords have also accelerated sales of rental properties due to new regulations, tax hikes, and higher mortgage costs, increasing market supply. Savills’ head of research, Lucian Cook, noted that despite strong early-year activity, rising borrowing costs and weaker sentiment will dampen demand for the rest of 2026.