‘What will happen to house prices next year?’ — it’s a tricky question

It’s party season and the question I am asked the most — usually within about 35 seconds of meeting someone — is: “So, Neal, what’s going to happen to house prices next year?”

I used to ask a series of counter questions about where the person lived and in what, when they bought and what they paid for it, considering they’re all crucial in determining what might happen to the perceived value of their property in the next 12 months. But people tended to glaze over, so now I sort of shrug and say “up . . . ish.” This normally leaves the other person looking relieved.

It turns out the expert forecasters for 2026 feel pretty much the same as me — Nationwide, Savills, Rightmove and Hamptons all think the average property price will finish next year between 2 and 4 per cent higher than they started it. HM Treasury publishes a summary of independent forecasts, where the City forecasters are slightly more bullish with an average of 3.2 per cent compared with 2 per cent for the economic consultancies. Meanwhile, the OBR has gone for 2.8 per cent (at Q4 2026).

So, for once, there’s a clear consensus: prices will be pretty much flat next year in real terms. It appears that rising incomes and falling mortgage rates will support small price rises, while increasing supply on the market will curtail any excess growth.

Is that what will actually happen? No idea. It’s a sensible enough projection. But then I remember when I first started working as a housing analyst for an estate agent in 2005. We’d just been through a sharp rise in house prices and there was widespread consensus we were in for a period of stagnation for a few years as affordability rebalanced.

Cue the final push of the biggest house price bubble of the century. Values hit record highs — before the credit crunch and financial crisis hit.

It took time for those in the UK’s housing market to realise what was happening. Even after the Northern Rock bailout in the autumn of 2007, estate agents were predicting price growth of 3 per cent the following year. House prices ended up down 16 per cent in 2008, according to the Nationwide index.

In fact, my audit of previous forecasts found that they tended to have a better correlation with what prices did in the year they were made, rather than the year they were forecasting.

Like any financial modelling, forecasting is probably more art than science — not least thanks to the poor quality and bias of some housing data (not that it’s ever stopped people publishing forecasts to two decimal places). And that’s before you get to the inevitable bias in the process.

Back when I worked for an estate agent, I picked up a few tricks. If you’re expecting some turbulence in the year ahead, use a longer forecast period. That way, weaker growth or price falls in the short term can be offset by stronger growth at the back end of your typically five-year forecast period. Then, give a cumulative growth figure over the period and it looks more enticing to your clients.

But the best trick I learnt was, when in doubt, introduce a scenario. This especially helps if you’re staring down the barrel of a crisis: an outcome with a 40 per cent probability can be useful for highlighting risks while not freaking everyone out.

Given how imprecise the whole thing is, you might well ask why we even bother with forecasting in the first place. The answer is, for all their faults, house price predictions are not actually as useless as you might think.

First, the OBR uses them to help forecast important things, such as stamp duty receipts and disposable incomes — though I have issues with the extrapolations they’ve made from the data this year, but I’ll get to that later. Forecasts are also used in the marketing or consultancy for new developments, since they are crucial for making investment decisions (though why anyone would base their financial modelling on forecasts made by the same company that’s trying to sell them a property is beyond me).

But the most important reason why estate agents make predictions is simply because they get press coverage. The papers love a house price story and forecasts are a very cheap way to get your company’s name inserted into the national conversation.

And this may have more impact on you and your property decisions than you’d like to admit. When it comes to buying and selling what is for most people by far the most important asset in their life, vibes play an outsized role.

Research by the Institute for Fiscal Studies found that people’s view of their home’s value is based far more on the — often incorrect — perception of house price changes, together with cues from the local economy, than on the trifling matter of what houses in their area are actually selling for.

Media reports — both locally and nationally — may therefore be highly influential on short-term changes in the housing market.

A further consideration is the role of price anchoring, especially following a downturn. While national prices may have recovered and are indeed at record highs, prices in London and the south of England are still stagnating.

Research shows people tend to avoid moving if they fear getting a lower price than they think their home is worth, with that price set not by what they paid for it, but what they think it was worth at the peak of the market. If the market is forecast to improve, that may be the incentive that some potential sellers need to get moving.

Forecasts may also affect people’s attitude towards costs and taxes, chiefly stamp duty. No doubt it’s a stupid tax, but it’s one thing to pay a transaction tax of 4, 5 or 6 per cent of the purchase price when you expect house prices to rise by double digits over the following year. It’s something quite different when prices are forecast to stay broadly flat — especially if that home is a mansion in Mayfair and you’re paying an effective tax rate of 16 per cent! Is it any wonder the top end of the UK market has been under water for years?

There are multiple variables that determine the future trend in house prices — not least because the housing market is a complex, interconnected system and you need to consider activity levels alongside prices (a house price forecast that doesn’t also discuss what will happen to transactions should probably be ignored). But the fact that the forecasts for 2026 are pretty tightly grouped is because they all seem to be following a fairly cautious view of where interest rates will be next year.

For example, the OBR does not explicitly forecast mortgage rates on new lending, but its prediction for the average rate on outstanding balances shows a sharp increase in 2026-27 and continues to rise to 5.1 per cent in 2031 — that’s just below the 5.3 per cent peak for new mortgages during the dark days of 2023. That suggests a sharp rise in mortgage rates on new lending, even when accounting for the final holdouts coming to the end of their sub-2 per cent fixed-rate deals over the next two years — I’m not sure that all tallies with their price growth picture, if I’m being critical.

Still, it’s not difficult to envisage how circumstances might conspire to create more growth. If inflation keeps low and the Bank of England’s rate cutting cycle can continue, then as mortgage rates fall towards 3 per cent, it could lead to higher price rises, especially with regulators’ looser approach to lending criteria and stress testing.

Previously the most excited responses from people at parties would’ve been from the prospect of a house price boom. These days, “up . . . ish” is more than enough for many, especially if they have adult children they’d quite like to move out some time soon.

Neal Hudson is a housing market analyst