We think house prices will fall by -1.5% next year, with the drawn-out conflict in the Middle East weighing on sentiment and mortgage rates. As the economic outlook improves and mortgage rates moderate from 2028, demand for homes will increase, allowing prices to rise by an average of around 16% in total over the next five years.

Groundhog Day

In the spring, we forecast that UK house prices would fall by -2.0% in 2026. This downgrade was due to the conflict in the Middle East, its impact on the global economy and the expected effect on debt costs.

According to Nationwide, prices have come off by -1.1% since April, and we think they will continue to fall over the final few months of the year. Forward indicators from the RICS suggest that demand is still low, while the amount of unsold stock on the market is at its highest in more than a decade. So far, so (depressingly) accurate.

But in the spring we also forecast that prices would start to recover in 2027, as inflationary pressures subsided. That assumption has proved less well-founded.

And so it feels like Groundhog Day at Savills Research, because we are once again facing an interest rate outlook which is substantially worse than when we last forecast. The conflict in Iran looks set to drag on into next year. This will keep mortgage rates higher for longer. Now, we only expect them to drop below an average figure of 5% in early 2028.

All the signs point to house prices continuing to fall modestly over the next year. We think the total peak-to-trough fall will be around -3.0%, with an adjustment of -1.5% in 2027.

Several factors should help stop prices falling by more than this. Most homeowners have already absorbed higher mortgage rates agreed since late 2022, so only a small minority of those on five-year (or longer) fixes will experience the shock of remortgaging from a sub-2% rate. And the labour market remains robust, with only a very small rise in unemployment. Together these factors will keep the number of forced sales low.

Reasons to be cheerful about the recovery

Lower interest rates remain the key to a sustained housing market recovery, improving affordability and allowing prospective buyers to borrow more. Oxford Economics expects the base rate to fall from early 2028, allowing mortgage rates to moderate. That means we can be more positive about the medium-term outlook.

Lower rates will take time to impact house prices, because consumers need time to recognise the improvement in affordability and then act upon it. We see 2028 as a year of two halves for that reason, with price growth picking up in the second half of the year, reaching 3.5% in total for the year.

There’s capacity for stronger growth of 5.0% per year in 2029 and 2030 as mortgage rates bottom out. At this point, affordability will be much improved, partly because of lower rates and partly because income growth will have outpaced house price growth consistently over the preceding six years.

And reasons to remain realistic

But the capacity for growth in the long term is reduced compared to previous forecasts. Interest rates are now expected to settle at a higher long-term level, meaning affordability will not improve by quite as much as we were previously expecting.

With inflation, interest rates and economic growth all steady, we expect house price growth broadly in line with income growth at 3.0% in 2031.

That means we expect house prices to rise by 16% over the next five years, higher than CPI inflation (10%) and income growth (14%) without running away with themselves.

Fried or scrambled, sir?

You could argue that putting any economic forecast to paper at the moment is a surefire way to get egg on your face. As such, the discussion around the potential risk factors is as important as the numbers themselves. We think there are two hazards this time around.

Firstly, our forecast relies on a medium-term drop in interest rates. But rates won’t fall while energy markets continue to be disrupted. That means that if the war in Iran escalates or drags on beyond the next year, we might not see a pick-up in housing demand in 2028, resulting in lower growth. On a more positive note, there is also an upside risk if the conflict is resolved sooner than expected, which could lead to an earlier housing market recovery.

The second key risk relates to the state of public finances. As the experience of the last four years tells us, if bond markets don’t believe the government of the day’s story regarding fiscal responsibility, this quickly puts upwards pressure on mortgage rates. Encouragingly, the response to this year’s Budget suggests that, for now, the market is buying what the Chancellor is selling.

Houses vs flats

Not all homes are created equal. Having made almost no discernible difference for two decades, property type now appears to be a key determinant of price growth. Nationally, houses have seen an average of 44% price growth in the decade to June 2026, compared to just 14% for flats, according to Land Registry data.

There are a number of reasons for this difference.

Firstly, we know the pandemic provided a big boost to the demand for houses over flats, as buyers sought more space. Though that driver has become less pronounced, more flexible working patterns still mean more buyers want space for a home office.

Secondly, we know buy-to-let investors often acquired flats as they built up their portfolio. Demand from that class of buyer has fallen, and more of that stock has been brought to the sales market, as many reassess their options.

Thirdly, by the time they come to buy, many first-time buyers are in their mid-30s and are looking for family housing rather than starter flats.

And finally, concerns around building safety and leaseholds have left many flats with an image problem.

We think these trends will continue to drive a difference between houses and flats over the coming five years. Lower rates and looser mortgage regulation could bring some younger people into the market, but in all likelihood it is unlikely to outweigh this larger structural shift in demand.

^{Note: These forecasts apply to average values in the second-hand market. New build values may not move at the same rate}

_{Read the other articles within our Residential Forecasts 2027–2031 below}

< To read more of our Residential Research please visit our Residential Hub.

For more information, please contact your nearest local office or arrange a market appraisal with one of our local experts.