knight frank has revised down its near-term UK house price forecasts, citing the weak economic backdrop, but has become more positive about growth prospects in the longer term.
The property agency said the combination of high mortgage rates, soft buyer sentiment and uncertainty linked to the Middle East conflict had created a “triple headwind” for the market, prompting it to lower its short-term outlook.
It now expects UK house prices to rise by 1.5% this year, followed by 3% in 2027 and 4% in 2028. This marks a decline from its previous forecast in September, which had projected growth of 3% in 2026 and 4% the following year.
The firm said the impact of recent geopolitical developments is beginning to be felt on UK economic data, with early indicators still sending mixed signals. While Halifax reported annual home price growth slowed to 0.8% from 1.2% in March, the nationwide index saw an increase of 0.9% to 2.1% over the same period.
Macroeconomic indicators remain equally unclear. Inflation is forecast to rise to 3.3% in March due to higher energy costs, although underlying inflation remained lower than expected at 3.1%, strengthening the case for the Bank of England to keep rates on hold in the near term.
Meanwhile, the decline in unemployment is being attributed less to economic strength and more to rising economic inactivity, with fewer people actively participating in the labor market, rather than increased job creation.
Tom Bill, head of UK residential research at Knight Frank, commented: “In short, we will only know the full impact in the coming months, depending on how long the war lasts and to what extent it escalates. If it ends relatively soon and UK labor market data remains weak, rate cuts could be back on the Bank of England’s agenda after three to six months of inflation growth, according to Michael Brown, an analyst at Pepperstone.
“For now, swap rates, which lenders use to price fixed-rate mortgages, have risen significantly. The five-year swap rate was trading at around 4% this week, compared with less than 3.5% before the war started. However, that figure has fallen from 4.3% in March.”
He continued: “It is also worth noting that any impact on house prices will be mitigated by the fact that more residential property in England is owned outright (36%) than mortgaged (29%).
“Another long-term risk is how the government responds to the economic shock, including the possibility of tax speculation ahead of the autumn budget. This year, there is additional uncertainty over whether Rachael Reeves and Keir Starmer will be in Downing Street after the summer.
“Making predictions at this time especially comes with a long list of caveats.”
Despite widespread market uncertainty, Knight Frank has raised its long-term forecasts on the assumption that a new government will take office in 2029.
Bill explained: “Given how fragmented UK politics has become since the general election in July 2024, the composition and durability of any new government is uncertain. However, current polling suggests that policy will be shaped by a strong tendency for lower taxes and tighter controls on government spending.
“Such an approach has the potential to put downward pressure on government borrowing costs and improve affordability in the housing market. Meanwhile, any funding-related stimulus will dampen demand in key markets.
For example, the Conservative Party has said it would abolish stamp duty to encourage economic growth. This will not be a straightforward process, but as we have seen in recent years, a party does not need to be in power to change thinking on policy, especially if it resonates with voters. Politicians will certainly need to address a broader question about whether taxing property transactions makes fiscal sense.
“Although the composition of the next government is highly uncertain, we believe a change in political direction will lead to annual house price growth in mainstream and niche markets of more than 5% in 2030.”
rental forecast
Knight Frank has reduced its rental forecasts modestly, but rents will remain under pressure this year following the introduction of the Tenant Rights Act.
The bill states: “The new rules, which will come into effect on May 1, will increase the risk for landlords in repossessing or selling their properties, setting rents and guaranteeing rental income. These additional risks will require additional reward and will put upward pressure on rents.
“This could increase further due to a lack of supply as more landlords leave the area after the new rules come into force. We expect 3.5% annual growth in prime central and outer London this year, which is higher than the current respective rates of 1.2% and 2.8%.
“Rental activity will also benefit in the short term as demand from the sales market increases as higher borrowing costs curb spending power and the current geopolitical uncertainty means people are keeping their options open. Activity has also been supported to some extent by people looking to move back to London from the Middle East.”