Happy New Year – January 2026 - Residential Property Market Update

As we enter 2026, the UK residential property market is best characterised as stable but subdued, having largely adjusted to higher interest rates, tighter affordability, and prolonged fiscal uncertainty. Following a hesitant second half of 2025, activity levels are now broadly aligned with long-term pre-pandemic norms, although price growth remains modest and highly location-dependent.

National Market Overview

House price indices show that values edged up slightly during 2025 but failed to keep pace with inflation, meaning prices have fallen slightly in real terms. Nationwide reports that UK house price growth slowed sharply towards the end of the year, with annual growth easing to 0.6% in December 2025, down from 1.8% in November, reflecting weaker momentum in the final quarter of the year. Halifax places growth at around 0.7% to 1%, depending on the measure used .

Savills reports that mainstream UK house prices rose by around 1% in 2025, with growth expected to remain constrained during 2026 before strengthening from 2027 onwards. The consensus across lenders, agents, and analysts is for modest national price growth of circa 1.5% to 3% in 2026, with affordability rather than demand being the principal constraint.

Transaction levels in 2025 had stabilised at approximately 1.1–1.2 million annual sales, aligning with historic averages. Mortgage approvals are now sitting near pre-pandemic levels (around 65,000 monthly approvals), suggesting that the market has absorbed the shock of higher borrowing costs. However, completion times do remain extended due to heightened buyer caution. Buyers are highly price-sensitive and increasingly more concerned with condition and energy-efficiency, causing properties that are over-priced or require work to face significant delays or fall-throughs.

Regional Performance

Northern England, parts of the Midlands, Scotland, and Northern Ireland continue to outperform the rest of the country, supported by relative affordability and stronger value propositions. Savills and Zoopla data show that many northern regions recorded above-average growth in 2025, while London and much of the South East lagged behind .

According to the Office for National Statistics (ONS) UK House Price Index, average residential values in London fell by 2.4% in the 12 months to October 2025, making London the weakest-performing English region over that period. This contrasts with positive annual growth across all other regions, particularly the North East and parts of the Midlands. Data published by Nationwide and Savills indicates that this divergence has narrowed the historic north–south price gap to its smallest level since around 2013.

Prime Central London

Prime Central London continues to face headwinds. Savills’ research highlights the impact of recent tax increases, reduced international investor demand, and uncertainty around future fiscal policy, all of which have contributed to weaker sentiment and increased stock levels .

Values in this segment are now materially below their mid-2010s peak, with Savills estimating prices around 20%+ below 2014 levels in nominal terms. While this has deterred some sellers, it has also created selective buying opportunities, particularly for domestic owner-occupiers and long-term buyers less exposed to future tax changes.

We have also seen that buyer profiles in central London have shifted. Younger purchasers and UK-based owner-occupiers now account for a greater share of transactions, while investor participation has reduced. Savills reports that buyers under 40 represented nearly half of Prime Central London purchasers in early 2025, compared with roughly one-third a decade earlier .

First-Time Buyers and Mortgage Conditions

We are hopeful that first-time buyers will be a key driver of activity in 2026. Gradually falling mortgage rates, combined with earnings growth running ahead of inflation, should support improved affordability at the entry level of the market. This includes the scheduled increase to the National Living Wage from April 2026, which is expected to provide a modest boost to lower-income households.

The Bank of England reduced the base rate from 4.00% to 3.75% on 18th December 2025. Several lenders are now offering fixed-rate mortgages below 4%, and economists broadly expect further base rate cuts during 2026, albeit at a gradual pace. Also, according to Halifax and Nationwide, the proportion of household income typically spent on mortgage repayments by first-time buyers has fallen from its 2023–24 peak and is now closer to long-term historical averages, reflecting the combined effect of easing mortgage rates and continued earnings growth.

However, affordability remains the key challenge for 2026 in higher-value markets (such as London), where elevated purchase prices mean that buyer budgets remain sensitive to interest rates and deposit requirements. As a result, pricing realism will be critical for vendors moving into the year ahead..

Rental Market Conditions

The residential rental market remains undersupplied, though rental growth has moderated. Zoopla reports UK rental growth of approximately 2%–3% per annum, down from the elevated levels seen in 2022–24.  

The London rental market experienced slower growth than in recent years; however, ongoing supply shortages mean demand continues to outpace availability in most well-located areas, thereby sustaining elevated rental levels across the capital.

Savills notes that landlord profitability continues to be eroded by higher borrowing costs, increased taxation on rental income, and forthcoming legislative changes, including the Renters' Rights Act 2025 (formerly the Renters' Reform Bill), which will bring about the abolition of Section 21 notices on 1st May 2026 . This is likely to constrain rental supply further, even as demand remains robust, particularly in London and other major employment centres.

London Sub-Markets and Localised Demand

While headline London performance remains constrained, demand is increasingly hyper-localised. Recent analysis of buyer demand highlights strong competition in well-connected “urban village” locations such as Highbury, Islington, Stoke Newington, East Dulwich, and parts of Hackney and south-west London, where lifestyle appeal, schools, and green space underpin demand despite wider market caution .

At the more affordable end of the market, we have also observed pockets of price resilience and modest growth, particularly within the small freehold house sector. From our own work at LPS Advisory, we noted demand has remained relatively robust for lower-priced houses in less prime locations, where the price point for a freehold interest remains attractive compared with leasehold flats or higher-value stock. This reflects both first-time buyer demand and a preference among purchasers to avoid leasehold exposure where budgets allow.

This reinforces the growing segmentation of the market, where micro-location, property type, and condition are increasingly influential in determining liquidity and pricing outcomes.

Outlook for 2026

Looking ahead to 2026, our outlook for the London residential property market is increasingly stable and cautiously positive. While forecasters do not expect a rapid rebound, there is growing consensus that the capital will experience broadly flat to modest price growth, with conditions improving gradually as mortgage rates ease, wage growth remains positive in real terms, and buyer confidence continues to recover following the Autumn Budget.

As always, London continues to benefit from strong underlying demand, supported by its large employment base, international appeal, and limited housing supply. While affordability constraints are likely to cap short-term price growth, we believe that well-located, sensibly priced homes will continue to attract strong buyer interest and transact efficiently, supporting healthy levels of market liquidity.

For buyers, we believe that 2026 presents an opportunity to transact in a more balanced market with greater choice and negotiating leverage than in recent years. For sellers, accurate pricing and presentation are key, but conditions are notably more settled than during the uncertainty of 2024–25. Landlords and long-term investors are expected to remain active where assets are well-located, compliant, and aligned with longer-term rental demand trends.

As always, informed, evidence-based advice remains essential in navigating an increasingly segmented and cautious market. If you require independent, tailored advice in relation to buying, selling, or holding residential property in London, we would be happy to assist – please do not hesitate to contact us.

We would like to thank all clients and professional contacts for their continued support and wish everyone a successful and prosperous New Year.