The estate agency has also downgraded its forecast for 2026 growth from 4% to 3%.

But its analysts expect rents to increase by marginally more than previously thought as a result of the “unintended consequences” of government reforms.

In today’s update, head of UK residential research Tom Bill says: “A combination of high supply and faltering confidence means we now expect slower UK house price growth this year and in 2026.”

Over-supply of listings keeps prices in check

Bill points to factors such as April’s stamp duty changes and US president Trump’s tariff wars as having distorted the mainstream market earlier this year.

He says: “The market spent the next few months getting back on its feet, helped by a stable rate environment and the presence of sub-4% mortgages.

“Mortgage rates have moved little in either direction since January despite three Bank of England cuts, largely because the reductions were priced in.

“However, prices have come under pressure because demand hasn’t kept pace with supply, which has remained high thanks to a hangover of stock from the April stamp duty cliff edge, the appearance of listings delayed from 2024 due to the general election and a growing number of landlords who are selling due to the tougher regulatory environment.”

The number of new prospective buyers in the UK was 8% lower in the year to August compared to the previous 12 months, while new sales listings increased by 6% over the same period.

Bill says: “That imbalance, combined with a general sense of hesitation as November’s Budget approaches, has driven our modest short-term downgrades for UK and Greater London house prices.”

Prime forecasts impacted by tax speculation

Knight Frank is now predicting a 4% drop in prime central London prices this year, down from 0% in May, followed by a flat market in 2026.

It expects prime country prices to fall by 5% in 2025, after previously forecasting 2.5% growth in its May outlook.

However, it believes that prime country house prices will return to growth next year, increasing by 2% in 2026.

Knight Frank’s downgrades to prime London and country forecasts have been driven mainly by speculation over property and wealth taxes.

Reforms to drive rents higher

Knight Frank has increased its forecast for rent rises next year from 3.5% to 4% in  prime central and outer London.

Bill says: “The upwards pressure on rents is partly the result of landlords selling ahead of the Renters Rights Bill, which could make regaining possession of a property more onerous and raises the risk of void periods.

“The prospect of stricter green regulations have also made landlords consider their options.

“And that was before the recent speculation around plans to charge national insurance on rental income.”