The downgrade marks a significant shift from the firm’s previous prediction of 2% growth next year and reflects mounting pressure on household finances amid higher borrowing costs and persistent inflation.

Despite the weaker short-term outlook, Savills remains optimistic about the longer-term prospects for the housing market, forecasting house price growth of 18.5% by 2030.

While this is lower than its previous five-year forecast of 22.2%, the firm believes improving economic conditions and easing affordability pressures will support a gradual recovery.

Savills predicts house prices will fall by 2% in 2026 before returning to growth, rising by 2.5% in 2027, 5% in 2028, and 6% annually in both 2029 and 2030.

According to Savills, escalating tensions in Iran and the resulting increase in inflation have contributed to higher mortgage rates, fundamentally altering the outlook for the UK housing market.

The firm says households are now facing increased mortgage repayments and reduced access to credit, weakening demand despite a strong start to the year.

Savills head of residential research Lucian Cook said: “Despite a robust start to the year for both price growth and activity, the rise in mortgage rates since late February has downgraded the short-term outlook. Higher borrowing costs and weaker sentiment will weigh on demand through the remainder of 2026.

“At the same time, lower demand is being set against elevated levels of stock – partially from landlords selling up in the face of greater regulation, which will place downward pressure on prices, particularly across submarkets in London and the South East.”

However, Savills believes several factors will help prevent a more severe downturn. Housing affordability has improved compared with 2022 following slower price growth, while stricter lending rules and the prevalence of fixed-rate mortgages have reduced the likelihood of widespread forced sales.

As a result, the firm expects only a modest correction in nominal house prices, with the greatest pressure likely to occur during the summer months when interest rates are expected to peak.

Savills cautioned that a prolonged conflict in the Middle East could further fuel inflation and push interest rates higher than currently expected. In such a scenario, house prices could face greater short-term declines before rebounding more sharply in subsequent years.

The property consultancy forecasts that market conditions will begin to improve in 2027 as mortgage rates gradually ease and economic prospects strengthen.

By 2030, average UK house prices are expected to have risen by around 18.5%, equivalent to approximately £67,000 on today’s values.

Savills projects inflation to fall back towards the Bank of England’s 2% target from 2027 onwards, while the Bank’s base rate is expected to decline from 3.75% at the end of 2026 to 2.5% by 2030. Average mortgage rates are forecast to fall from 4.78% to 3.5% over the same period.

Regional affordability is expected to play a key role in determining housing market performance over the coming years.

Savills forecasts that the North of England, Scotland and Wales will outperform more expensive southern markets while mortgage rates remain elevated, benefiting from stronger affordability levels.

The firm also expects houses to outperform flats in southern regions, as buyers remain cautious about leasehold arrangements and building safety issues.