In 2026, UK house prices are expected to rise modestly, improving affordability for homebuyers.

Investing.com - UBS Group released its latest research report on Thursday, indicating that UK residential property prices are expected to see modest growth by 2026, supported by income growth and improved credit conditions.

The Bank of England lowered the benchmark interest rate from 4% to 3.75% in December, with further rate cuts anticipated in June and September, potentially bringing rates down to 3.25%. As nominal wage growth outpaces house price increases, this accommodative monetary policy is expected to further improve housing affordability.

The average mortgage advertisement rate has fallen from a peak of nearly 6% in October 2022, with the typical two-year fixed rate currently around 3.9%, down from 4.60% by the end of 2024. Lenders have begun adjusting loan pricing in response to further monetary easing.

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However, short-term buyer demand may face resistance from renewed concerns over interest rates, particularly following rising energy prices. The economic backdrop is expected to remain weak, with GDP growth forecasted to slow slightly and the unemployment rate potentially rising to around 5%.

Year-on-year house price growth slowed to 1.7% in November, significantly below the 20-year average of 3.3%. By property type, townhouses are currently leading, followed by semi-detached and detached houses. Apartments and duplexes have become the weakest-performing segments, reversing the trends seen before 2020.

As of January, mortgage approvals remain stable at around 60,000 per month, indicating that the market still shows potential resilience despite weaker sentiment indicators from the Royal Institution of Chartered Surveyors.

Property values in prime central London remain below previous peaks, with the average price for a residence in the City of London around £740,000, down from approximately £1,000,000 in January 2022.

Amid limited supply, rents across the market continue to rise. Over the past five years, rents in all prime London locations have shown positive growth, with Belgravia and Marylebone leading the way.

The high-value municipal tax surcharge in the budget will take effect in April 2028, applicable to properties valued at £2 million or more. More urgently, with the rental reforms in the Tenant’s Rights Bill taking effect on April 30, landlords will no longer be able to issue new Section 21 no-fault eviction notices.

Consumer confidence remains low, with the GfK index at negative 19 in February. Wage growth has slowed to its lowest level in three years, with an annualized rate of about 4%, while January’s inflation rate dropped to 3%.

Despite recent uncertainties, structural demand drivers, including household formation and limited supply, are expected to support housing activity throughout the year.

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