UK house prices are expected to rise by 3% in 2026, despite recent increases in borrowing costs and economic uncertainty, according to Knight Frank. While stronger-than-expected UK data has pushed mortgage rates higher in recent weeks, the prospect of lower rates later in the year is one factor supporting price growth.
Markets had been expecting two Bank Rate cuts this year, though the likelihood of these reductions has fallen, with the five-year swap rate – a benchmark for fixed-rate mortgages – rising from 3.55% to 3.75%. This change suggests fewer lenders will be cutting rates in the near term, even as overall house prices are forecast to continue their upward trend.
“A lot of company earnings have been talking about the uncertain environment and headwinds they’re facing,” said Pepperstone research analyst Michael Brown. “So, I’m not saying I distrust the PMI, but I don’t think we should overreact to one report that doesn’t sing from the hymn sheet that all of the other reports do. We need to look at the data through February in terms of how the labour market is evolving.”
In other words, if more economic cracks start to show, expect markets to start betting more heavily on a second rate cut this year. And prepare for more optimistic news on mortgages.
One area of weakness that could increase the chances of a second cut this year is the jobs market. “The recent jobs numbers pointed to a fourth straight monthly decline in employment,” said Brown. “It was the biggest month-on-month fall in employment since November of 2020 when we were going into a lockdown.”
Before the recent jump in borrowing costs, the housing market had responded positively to the certainty that followed November’s Budget. The number of transactions in December was in line with the five-year average, HMRC said on Friday.
However, mortgage approvals were down 9% in the same month, suggesting a pre-Christmas rush to complete rather than the start of a more meaningful upturn in demand.
“Two other factors have put upwards pressure on borrowing costs in recent weeks, said Tom Bill, head of UK residential research at Knight Frank.
“First, the prospect of a debt-funded spending spree by the Japanese government, which has pushed global bond yields higher in recent weeks,” he explained. “Second, there is a similar concern closer to home. The possibility that Prime minister Keir Starmer could be challenged unnerved bond markets last month when Manchester Mayor Andy Burnham announced he would stand in this month’s Gorton and Denton by-election.”
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