Savills says mainstream house prices – already under pressure in much of southern England in particular – will fall further next year.
They will drop by an average 1.5% in 2027, as the Middle East conflict goes on.
In its forecast for the year ahead Savills pulls no punches, saying the interest rate outlook has continued to deteriorate with average mortgage rates now not expected to fall below 5% until early 2028.
It says house prices will continue falling over the remainder of 2026 and through 2027, resulting in a total decline of around 3.0%.
Transaction volumes are also forecast to fall in 2027 as higher mortgage rates weigh on buyer appetite, says Savills. Activity should begin to recover from 2028, although the pace will vary between buyer groups.
The Savills forecast is more gloomy than that of Connells, issued last week, which said prices would fall 1.0% by the end of this year but would then increase by 1.5% in 2027.
Emily Williams, director of residential research at Savills, comments: “The drawn-out conflict in the Middle East has pushed back the prospect of meaningful mortgage-rate relief, which will weigh on buyer sentiment and affordability. We expect this will suppress activity and put pressure on prices next year.
“But this is unlikely to trigger a sharper correction.
“Most homeowners have already absorbed higher borrowing costs since late 2022, with relatively few still needing to refinance directly from rates below 2%, and the labour market remains resilient.
“Together, these factors should keep forced sales low and limit further downward pressure on prices.”
Savills draws some consolation from the fact that a five year forecast shows prices eventually rising again.
House price growth is expected to accelerate during the second half of 2028, reaching 3.5% for the year.
Growth is then forecast to reach 5.0% in both 2029 and 2030 as mortgage rates bottom out and six consecutive years of income growth outpacing house price growth increase buyers’ purchasing power.
First-time buyers are expected to lead recovery from 2028, with deposit affordability at its best level since 2008.
Less stringent mortgage stress testing, relaxed restrictions on high loan-to-value lending and the government’s ‘Your First Home’ scheme should support activity, enabling this group to overtake cash buyers as the largest buyer group by 2029.
Home mover activity is likely to remain subdued until improved affordability releases pent-up demand from 2028 onwards.
Cash purchases are also expected to decline, while lower returns and increased regulation and higher taxation will keep buy-to-let activity below its long-term average and accelerate the shift towards larger, professional landlords.
The strongest five-year house price growth is forecast across the North of England, Wales and Scotland, where relative affordability and economic prospects provide greater capacity for values to rise.
In the three northern regions, average house prices remain below six times average earnings. In London, this figure is 11.3, meaning buyers either need above-average incomes or very large deposits to get on the ladder.
This has caused prices to converge across the country, as is common in the second half of a housing market cycle, with prices rising by 53% in the North West and just 12% in London.
But as the affordability gap remains wide, Savills expects a similar pattern of growth over the next five years.
This article is taken from Landlord Today