House prices forecast to rise modestly while rent inflation cools after years of sharp increases

First-time buyers are expected to become the main driving force of the UK housing market in 2026, as falling mortgage rates and easing affordability constraints encourage more people onto the property ladder.

Lenders and estate agents forecast a moderate recovery in the sales market, with house prices rising by between 2% and 4% next year. Rent increases, which surged in recent years, are expected to slow, reflecting weaker growth in tenant incomes and improving supply conditions in some areas.

Lower mortgage rates, pay growth outpacing inflation and subdued house price inflation have combined to improve affordability for new buyers. Halifax said monthly mortgage payments for first-time buyers, as a share of income, are now at their lowest level since 2022.

House prices rose more slowly than expected in 2025 after a stamp duty holiday ended in March and buyer confidence was shaken by global and domestic uncertainty. Market activity was hit by concerns over US trade tariffs announced by Donald Trump in April, followed later in the year by speculation over potential property tax changes ahead of Rachel Reeves’s budget in November.

Nationwide said average UK house prices rose by 1.8% in the year to November, taking the typical property value to £272,998. Lenders and estate agents now expect prices to rise by just 1% to 2% in 2025, well below the inflation rate of 3.2% and lower than forecasts made a year earlier.

The Bank of England has been slower than expected to cut interest rates as it battles inflation, but delivered a reduction before Christmas, taking borrowing costs to their lowest level in almost three years. Economists expect two further cuts in 2026.

Mortgage lenders have already responded, offering fixed-rate deals below 4%. Santander is currently advertising a two-year fix at 3.55% for borrowers with a 40% deposit.

Forecasts from Nationwide, Halifax, Savills, JLL, Knight Frank, Hamptons, Rightmove and Zoopla suggest house price growth will remain modest, before strengthening to about 4% in 2027 and up to 5.5% in 2028.

Regional trends continue to diverge. London prices have been falling and are expected to be broadly flat in 2026, while stronger growth in northern England has narrowed the north-south price gap to its smallest level since 2013, according to Nationwide.

Looser mortgage rules are also supporting demand. Buyers can now borrow larger amounts with smaller deposits, while affordability stress tests have been relaxed. The Financial Conduct Authority has announced plans aimed at helping first-time buyers and self-employed workers access mortgages.

“Buyers might be able to purchase with a 10% or 15% deposit, which makes a huge difference, particularly in London and the south-east,” said Emily Williams, a director of residential research at Savills. “That can knock two or three years off the time needed to save.”

Nationwide’s chief economist, Robert Gardner, said mortgage payments for a typical first-time buyer with a 20% deposit have fallen from more than 38% of income in 2023 to about 33%, close to the long-term average. He expects the ratio to fall further in 2026.

Hamptons said first-time buyers accounted for a third of all purchases in 2025, a record high, and half of transactions in London. Its head of research, Aneisha Beveridge, said their growing importance partly reflected reduced activity from existing homeowners, deterred by high stamp duty costs.

Williams said changes under the Renters’ Rights Act had prompted some landlords to sell, with smaller and cheaper homes often bought by first-time buyers.

The budget also confirmed a council tax surcharge on homes worth more than £2m from April 2028, though the so-called mansion tax was less severe than feared. JLL said central London sales activity picked up sharply after the announcement, reaching its highest level in 17 months in November.

Despite signs of improvement, the market remains sluggish. Homes are taking more than 200 days on average to sell, compared with a typical 150 days, Dixon said. Rising unemployment, now at a four-year high of 5.1%, and a weak economic outlook continue to weigh on confidence.

For renters, average increases are expected to slow to between 2% and 3.5% in 2026. Official data showed private rents rose by 5% in the year to October, taking the average monthly rent to £1,360.