UK house prices edged higher in January after an unexpected dip at the end of last year, with the country’s biggest mortgage lender forecasting further improvement into 2026 as borrowing costs ease and confidence slowly returns to the market.
Figures from Nationwide show the average UK home price rose by 0.3% in January, reversing a 0.4% fall recorded in December following uncertainty triggered by Chancellor Rachel Reeves’s late-November Budget. Annual growth has now returned to positive territory, with prices up 1% compared with a year earlier.
The average property price across the UK now stands at £270,873, according to Nationwide’s latest data.
Lenders forecast growth through 2026
Economists expect momentum in the housing market to build over the next year as mortgage rates gradually fall and concerns over tax changes fade. Nationwide has forecast UK house prices will rise by between 2% and 4% this year, while Capital Economics predicts growth of around 3.5%.
Robert Gardner, Nationwide’s chief economist, said activity slowed briefly at the end of 2025 due to pre-Budget uncertainty, particularly around potential property tax reforms.
Despite this, mortgage approvals remained close to pre-pandemic levels, suggesting underlying demand has remained resilient.
Budget uncertainty weighs on late-2025 activity
Gardner said housing market activity is likely to recover over the coming quarters if affordability continues to improve. The chancellor’s Budget introduced a new council tax surcharge on homes worth more than £2m, but stopped short of broader property levies that had been widely speculated about.
This decision helped calm fears of sweeping tax changes, supporting buyer sentiment at the start of 2026.
Nationwide estimates that a first-time buyer on an average income purchasing with a 20% deposit now faces mortgage payments equivalent to 32% of take-home pay. While slightly above the long-term average of 30%, this is well below the 38% peak seen in 2023.
Mortgage demand remains fragile
Despite the improvement in prices, some property experts warn the recovery remains delicate. Tom Bill, head of UK residential research at Knight Frank, said mortgage approvals in December were still 9% below the five-year average.
He added that expectations for further interest rate cuts this year have cooled, partly due to stronger-than-expected UK economic data.
This suggests that while prices may stabilise, transaction volumes could remain under pressure in the short term.
Interest rates and inflation outlook
The Bank of England cut its base rate from 4% to 3.75% in December after inflation fell to 3.2% in November, down from 3.6% the previous month. While inflation remains above the Bank’s 2% target, policymakers believe the peak of price pressures has passed.
However, MPC member Megan Greene has warned that strong wage growth and expected rate cuts in the US could limit how far UK rates fall this year. The Bank is widely expected to hold rates at 3.75% at its next meeting.
Fixed-rate mortgages set to expire in 2026
Households are also bracing for financial pressure as millions of fixed-rate mortgage deals come to an end. Alice Haine, personal finance analyst at Bestinvest, said around 1.8 million fixed-rate deals are due to expire in 2026.
Many borrowers will be moving from ultra-low five-year deals to significantly higher rates, squeezing disposable incomes at a time when unemployment is rising and living costs remain elevated.
She said this could temper buyer confidence even as mortgage rates ease from recent highs.
Cautious optimism for the UK housing market
While challenges remain, economists broadly expect 2026 to mark a period of modest recovery for the UK housing market, supported by easing borrowing costs, improving affordability and reduced policy uncertainty.
However, analysts caution that the pace of growth is likely to be gradual rather than a return to the rapid price inflation seen during the pandemic years.