The Reeves budget, Trump, whomever you blame – things are looking worse
It was just a month or so ago when we seemed to be about to witness a new thaw in the housing market. Rates were dropping as lenders fought to push their rates below 4%, and there was a palpable air of excitement in the industry. But then swap rates started to rise as the enormity of the Labour government’s budget sunk in, Trump was elected, spooking some international markets, and then inflation started edging back up.
All of this has made estate agency Knight Frank revise its UK housing market forecasts – and not in a good way for homeowners. The estate agent now predicts slower growth in house prices over the next few years due to rising borrowing costs and a less favourable interest rate environment.
In its latest update, Knight Frank reduced its house price growth forecasts to 2.5% in 2025, 3% in 2026, and 3.5% in 2027, down from its previous predictions of 3%, 4%, and 5%, respectively. This revision reflects a cumulative growth estimate of 19.3% over five years, slightly below the 20.5% projected just three months ago.
Read more: Borrowing costs rise as Reeves budget fears spread
Tom Bill, Knight Frank’s head of UK residential research, explained the changes are mortgage driven: “We have seen a jump in borrowing costs since the Chancellor set out her economic plans and expect more downward pressure on prices and transaction volumes in the short term. Gilt yields are notably higher than recent Office for Budget Responsibility forecasts. As a result, mortgage lenders are reluctantly pushing rates higher, which will eventually feed through into house prices.”
Rising gilt yields, partially driven by investor concerns over the Autumn Budget’s potential inflationary impact, have slowed expectations for interest rate cuts by the Bank of England. Mortgage rates, which often track bond yields, have risen accordingly. The average two-year fixed mortgage rate now stands at 5.08%, higher than the 4.64% seen before the budget, according to Rightmove.
Read more: "Ho, ho, high!" Inflation dampens Christmas base rate cut hopes
This shift in borrowing costs has renewed affordability concerns, particularly for buyers in and around London, where higher average property prices exacerbate the impact of rising mortgage rates. Additionally, the decision not to extend stamp duty relief has sparked concerns about its impact on buyer demand and overall price growth.
Zoopla, another property platform, also adjusted its forecasts, warning that house price growth could slow by as much as 1% next year. “Faced with this higher cost, homebuyers will want it reflected in the price they pay for their home and will seek to make offers, keeping price rises in check over 2025 and into 2026,” said Richard Donnell, executive director at Zoopla.
Read more: Good property news for everyone – less so, London
The slowdown is expected to be felt unevenly across the country. Knight Frank predicts that the Greater London mainstream market will see cumulative growth of 15.3% between 2025 and 2029, slightly lower than earlier projections. Meanwhile, prices in prime central London are forecast to recover more gradually due to tax changes affecting overseas buyers and higher stamp duty rates on second homes.
For prime outer London and rural markets, Knight Frank anticipates similarly subdued growth in the near term. “The changes to our forecasts are not dramatic, and we will be in a better position to assess the outcome of the Budget and other policy decisions early next year,” Bill said.
While house price growth slows, Knight Frank predicts stronger performance in the rental market, with rents expected to rise by about 18% between 2025 and 2029. The uncertainty surrounding the Renters’ Rights Bill and a trend of landlords exiting the market due to tax and regulatory changes are expected to constrain supply, further driving rental increases.
Read more: Could Reeves shutter one million rental homes?
The advice to mortgage brokers remains the same – keep close to your clients and let them know that you’re there for help – no matter which way the market heads.
