Trouble in Gulf threatens house price recovery

Price growth remains lower than it has been since mid-2024, but lower borrowing costs and cooling inflation should encourage house prices to rise again throughout 2026.

However, this recovery could be undermined by the long-term effects of the conflict in the Middle East. Sustained increases in energy prices would risk reigniting inflation, adding to cost-of-living pressures and potentially forcing the Bank of England to keep interest rates higher for longer.

This combination would weigh on purchasing power and raise mortgage costs – dampening demand and limiting further house price growth.

Policymakers will be hoping this energy price shock is short-lived, and fears of monetary tightening are forgotten.

House prices will continue to be upheld in some capacity by a chronic shortage of supply, particularly in areas of high employment and limited new construction.

Nowhere is this more the case than in London, where severe undersupply is helping to prevent a more pronounced downturn in prices.

The government is not meeting its housebuilding targets and is failing to address the underlying structural issues in the housing market. Persistent undersupply continues to drive affordability pressures, limit labour mobility and widen generational divides.

Without meaningful progress on planning reform and housing delivery, these pressures are unlikely to ease.