“Despite the current mood of uncertainty, the fact that prices have fallen 20% over the last decade will present an opportunity for some”
– Tom Bill – Knight Frank
Pre-Budget nerves and high levels of supply mean we have downgraded our price forecasts. Meanwhile, our rental expectations have edged higher due to ongoing regulatory uncertainty.
Most UK economic forecasts have been revised downwards in recent months, and this will not be an exception.
A combination of high supply and faltering confidence means we now expect slower UK house price growth this year and in 2026. By contrast, we think rental value growth will be marginally higher in 2026 as government initiatives produce unintended consequences – again. In prime markets, speculation around taxes and wealth has kept buyer demand in check, prompting larger downgrades.
We now forecast average UK mainstream prices will rise by 1% in 2025, down from a previous figure of 3.5% in May. The Nationwide and Halifax indices are both hovering around 2%, having fallen from more than 4.5% at the end of 2024. We expect 3% growth in 2026, down from our previous forecast of 4%.
The low point for the UK housing market was in April, when nil rate bands for stamp duty increased and US President Donald Trump announced a series of trade tariffs, sparking short-term instability on financial markets and some of those UK growth downgrades.
High supply keeps lid on prices
The market spent the next few months getting back on its feet, helped by a stable rate environment and the presence of sub-4% mortgages.
Mortgage rates have moved little in either direction since January despite three Bank of England cuts, largely because the reductions were priced in.
However, prices have come under pressure because demand hasn’t kept pace with supply, which has remained high thanks to a hangover of stock from the April stamp duty cliff edge, the appearance of listings delayed from 2024 due to the general election and a growing number of landlords who are selling due to the tougher regulatory environment.
The number of new prospective buyers in the UK was 8% lower in the year to August compared to the previous 12 months. The equivalent change in new sales listings was +6%.
That imbalance, combined with a general sense of hesitation as November’s Budget approaches, has driven our modest short-term downgrades for UK and Greater London house prices.
Prime market politics
The story, unsurprisingly, is more complex in prime markets. The Budget is scheduled for 26 November, but the defining moment for markets arguably took place on 1 July. That was when Parliament passed a watered-down version of the Welfare Reform Bill. It left the government unable to cut its way to fiscal stability and led to a summer of speculation around property taxes, most of them aimed at the high-value end of the market.
Average prices in prime central London had been stabilising. They fell 0.8% in the year to January after falling 5% since the pandemic and 18% over the last decade.
However, the scrapping of non-dom rules and October’s hike in the additional rate of stamp duty to 5% from 3% eventually took their toll, and a mood of caution took hold.
We have therefore revised our 2025 forecast for prime central London to -4% from 0% in May. Our PCL price index stood at -3.2% in August. We have also downgraded our 2026 forecast to 0% from 2.5%.
We have also revised down our numbers for prime outer London, where demand is more needs-driven and less susceptible to policy changes like non-dom tax reform. We expect prices to be flat in 2025, down from +3% in May.
Long term price growth
Despite the current mood of uncertainty, the fact that prices have fallen 20% over the last decade will present an opportunity for some. “Savvy investors are making offers that factor in current pricing but that are ultimately buoyed by mid- to long-term growth prospects”, said Stuart Bailey, head of prime central London sales at Knight Frank.
Some will be betting on a more positive outlook in 2026, particularly as our five-year forecast will factor in the possibility of a different political landscape after the next general election in 2029.
We have also downgraded our forecast in the prime country market, where Knight Frank head of sales James Cleland believes more sellers are appreciating the importance of setting realistic asking prices.
We expect prices in prime country markets will fall by 5% this year, compared to an increase of 2.5% that we previously expected. Average prices fell 3.5% in the year to June. Our Country House Price Index tracks a range of urban and rural property markets above £750,000 outside London.
Rental forecasts edge higher
While we have downgraded our forecasts for the sales market, we believe upwards pressure on rents will increase modestly next year.
In a forecast that is otherwise unchanged, we expect renal values to rise 4% in 2026 in prime central and outer London, up from our previous expectation of 3.5%.
The upwards pressure on rents is partly the result of landlords selling ahead of the Renters Rights Bill, which could make regaining possession of a property more onerous and raise the risk of void periods. The prospect of stricter green regulations has also made landlords consider their options. And that was before the recent speculation around plans to charge national insurance on rental income.
The small upwards revision reflects a possible period of disruption after the Renters Rights Bill is introduced later this year and the backdrop of renewed tax uncertainty.
Unfortunately, “tax uncertainty” is a phrase likely to be repeated when we revisit our forecasts after November’s Budget.