London remains the weakest regional housing market in the United Kingdom, with average prices down 3.9% year-on-year — a real-terms fall of 6.9% once inflation is stripped out. The decline, confirmed in property data analysed in early May, comes as average two-year fixed mortgage rates have spiked from 4.83% at the start of March to 5.67% as of 8 May, according to data firm Moneyfacts.
The capital’s average house price now stands at £553,258 — still 104% higher than the UK average of £271,188, but down sharply from peaks seen in 2022. In Kensington and Chelsea, the average mortgage purchase price has fallen to £1.249 million, an 11.1% drop year-on-year.
“House prices to fall in coming months”
Knight Frank has issued one of the gloomiest forecasts in the market. Tom Bill, head of UK residential research at the firm, said: “The recent spike in mortgage rates will only put gradual downwards pressure on house prices as more favourable offers that pre-date the Middle East conflict take several months to lapse. It means some buyers are keen to complete while others have seen their spending power reduced. We expect house prices to begin falling in coming months but modest growth to return by the end of the year.”
The firm has cut its 2026 UK house price growth forecast to 1.5%, down from 3% before the war. Prime central London is now expected to drop 2% this year, against an earlier expectation of flat prices, while prime outer London is forecast to be flat against a previous projection of 2% growth.
The Iran war reshapes the mortgage market
The acceleration in mortgage rates traces directly to the Iran conflict. Brent crude has been trading around $110 per barrel since the closure of the Strait of Hormuz, with UK headline inflation climbing to 3.3% in March and expected to rise further. The Bank of England, which had been cutting rates from a 16-year high, paused at 3.75% in March and has signalled that hikes later in 2026 are possible.
Halifax has reported house prices falling for two consecutive months — down 0.5% in March and a further 0.1% in April. Economists at Pantheon Macroeconomics have cut their 2026 UK house price growth forecast from 3% to 1%, while Hamptons research found that 14.8% of Londoners who sold their property in 2025 did so for less than they had originally paid.
Withdrawals at record levels
The supply side tells a similarly weak story. Of London listings put on the market in April, 46.7% were subsequently withdrawn — a measure of sellers’ reluctance to accept current pricing. Aneisha Beveridge, head of research at Hamptons, said house price growth in London was “no longer the one-way bet it once seemed. In some cases, even owners who bought a decade ago still face getting back less than they paid.”
There are pockets of resilience. Zoopla data identifies Sutton, Uxbridge, and Ilford as outer-London areas with the strongest potential for an upswing in 2026. Faisal Choudhry, director of research at Savills, said the 2025 Autumn Budget delivered a “better-than-feared” outcome for top-end buyers, with the new annual mansion tax not taking effect until 2028.
But the fundamental problem remains supply. London is delivering around 35,000 new homes a year against a government target of 52,000 — a shortfall that has persisted regardless of which party has held office. For first-time buyers, the combination of weaker prices, sharply higher mortgage rates, and an uncertain political backdrop has produced what one estate agent described to Estate Agent Today as “a new normal of uncertainty.”
