Industry experts began the year with the view that falling interest rates would provide support to the UK’s sluggish property market.
Difficulties have been acute in London, where property prices fell by 1.7 per cent in the year to January, with growth in the country as a whole now around 1.3 per cent annually.
It was hoped that an energetic housebuilding campaign and cheaper mortgages could get the market moving.
However, despite the government’s pledge to build 1.5 million new homes by the end of this Parliament, housebuilding has collapsed to a 12-year low.
And even after the US-Iran ceasefire, traders were still pricing in an interest rate hike in December, marking a sharp reversal from March when traders expected there would be three rate cuts in 2026.
On Wednesday, April 8, The Guardian reported that the average two-year fixed mortgage had reached 5.9 per cent, up from 4.83 per cent on March 1.
Speaking to the outlet, Adam French, head of consumer finance at Moneyfacts, warned that even if the ceasefire holds, it may take some time before rates come down.
Put together, this puts the dampeners on an already subdued outlook, and analysts are already downgrading their expectations.
‘Housing Market to Soften’: Nationwide
In an April report, analysts at Nationwide foresee a softening of the property market, as it becomes caught up in the fallout from the Iran war.
Robert Gardner, chief economist at Nationwide, said the market showed signs of regaining momentum in March, but that the conflict threatens a “significant shock” which could soften the market:
“Towards the end of March, three interest rate increases were priced in over the next twelve months, compared to two rate cuts being anticipated before the strikes on Iran.
“This shift has resulted in a sharp rise in longer-term interest rates (swap rates) that underpin fixed-rate mortgage pricing.
“If sustained, this could reverse some of the improvement in housing affordability that has taken place in recent years.
“With consumer sentiment also likely to be dented by the uncertain outlook and the prospect of rising energy costs, housing market activity is likely to soften.”
Commenting on the report to the BBC, personal finance analyst at Moneyfacts, Caitlyn Eastell, said higher prices could keep first-time buyers out of the market:
“Many households may have to tighten their budgets in response to these rising costs, and first-time buyers with smaller deposits may be held back from getting on the property ladder.”
The report is a significant shift on the bank’s December outlook, which said expected interest rate cuts would improve housing affordability through 2026.
UK House Prices Fell in March: Report
Average UK house prices fell in March, according to a new report from Halifax, erasing a 0.3 per cent gain notched in February.
The drop was blamed on uncertainty arising from the Iran war, as well as higher mortgages and rising energy prices.
Amanda Bryden, head of mortgages at Halifax, said: “Concerns about higher energy prices have pushed up inflation expectations, which in turn led to a rise in mortgage rates, reducing confidence that interest rates will be cut this year and dampening the initial momentum in the market seen at the start of the year.”
Would-be homeowners are now said to be putting a purchasing decision on hold, with lenders increasing rates and pulling deals.
The fall in house prices comes despite the slowdown in housebuilding, which is facing stiff headwinds as higher energy prices drive up the cost of materials.
A recent report from S&P Global showed that February marked the 14th consecutive month in which construction activity fell, with the sector facing its highest input cost inflation since July 2025.
The report, which pre-dated the outbreak of the Iran war, noted that while housebuilding was down sharply, and inflation was up, industry figures were optimistic that economic conditions could improve by year’s end- a hope that may yet be dashed by the fallout from the Gulf.
Commenting, Tim Moore, Economics Director at S&P Global Market Intelligence, said: “Total industry activity has decreased in each month since January 2025, and the latest decline was faster than seen on average over this period.
“The reduction in output was largely due to sluggish demand conditions, but some firms also noted that exceptionally wet weather had disrupted construction projects….
“Sharply rising input costs were a challenge in February. The rate of purchasing price inflation hit a seven-month high as suppliers passed on rising raw material costs, especially metals.”
However, the report contradicts findings by Nationwide that house prices increased in March. Industry experts say the Halifax report may be more reliable because it uses a larger sample size and has a broader geographic focus.
Could The Housing Market Bounce Back in 2026?
Though some experts believe the disruption to the UK housing market could be lasting, analysts at Capital Economics are more bullish, predicting the “Iran war’s property impact will be small and short-lived.”
In a report dated April 1, Capital Economics said while growth could be weaker than pre-war estimates, the impact on prices will be small, and softness will be “made up for” over a five-year horizon, their baseline scenario.
That base-case assumed the war continuing until the end of April – as of the time of writing, a fragile truce has been agreed in early April – suggesting that if it holds, this earlier than expected conclusion may represent upside risk to the outlook.
The broad consensus among analysts at the start of the year pointed toward a bounce back, but most of these forecasts predate the war and don’t account for a radically different lending landscape.
Speaking to MoneyWeek, Tom Bill, of Knight Frank, said the true impact on the market would only be understood when the conflict comes to a definite conclusion:
“Housing market data will increasingly reflect the current caution felt by buyers and sellers, with downwards pressure on transaction volumes and prices likely in the second quarter and possibly beyond.
“Only once the endgame in the Middle East becomes clear can we accurately assess any longer-term damage to the market.”
What’s Next For House Prices in London and the UK as a Whole
An optimistic mood at the start of the year has been soured by the Iran war, which has already seen mortgages spike, and house prices fall.
The assumptions that underpinned many forecasts, which pointed toward two to four per cent price growth, predate the war.
Nationwide’s House Price Review, published in December 2025, suggested property prices would rise between two and four per cent in 2026, driven by falling mortgage rates and wage growth outpacing house prices.
Halifax’s own pre-war estimate was similarly upbeat, forecasting price growth of around one to three per cent, though highlighting weaker wage growth and a softer labour market as potential headwinds.
Those headwinds have since intensified considerably. The average two-year fixed mortgage rate rose from 4.83 per cent on 2 March to 5.9 per cent on 8 April, its highest level since July 2024, while the average five-year fix rose from 4.95 per cent to 5.78 per cent over the same period.
As ever, the UK property market is an uneven one. Even before the war, London was lagging. Analysts anticipated stronger growth in areas outside London and the South East, including parts of the North, the Midlands and Scotland, which benefit from lower entry prices and stronger affordability.
With mortgage costs rising and consumer confidence falling, the capital’s premium market may be particularly exposed in the near-term.
On the supply side, the structural problems remain unresolved. There were 62,584 mortgage approvals in February 2026, compared with 65,114 in February 2025.
The government’s housebuilding ambitions, already badly off track, face additional pressure from elevated energy and materials costs that show no signs of easing quickly.
Should tensions continue to ease, mortgage rates could begin to fall later in 2026, but should the warring parties return to the battlefield, then there could be a sharp reversal.
Looking ahead, we see an outlook shrouded in uncertainty. The pre-war consensus has been overtaken by events, and the new consensus has yet to form.
What is clear is that the London property boom, such as it was in its recent modest incarnation, is on hold, and the length of that pause may remain unclear until we see more clarity around events in the Middle East.