UK house prices stall at £268,000 as higher mortgage rates bite

UK house prices recorded their first 12-month period of zero growth in almost two years, the Office for National Statistics reported Wednesday, as the average two-year fixed mortgage rate surged 0.9 percentage points to 5.73 per cent since the US and Israel struck Iranian targets in late February. The average home sold for £268,000 in March — unchanged from March 2025.

The data are the first to capture the full transmission chain from the Persian Gulf to Britain’s household balance sheets. Energy markets spiked on the outbreak of conflict, inflation expectations firmed, gilt yields rose, and lenders repriced their mortgage books inside a fortnight. By the time the ONS house-price index closed the March reference period, two-year fixes — the product that prices roughly 60 per cent of new UK mortgage lending — had jumped from below 5 per cent to 5.73 per cent, according to Moneyfacts data cited by Bloomberg. On the Halifax measure, which runs a month ahead, the average price slipped 0.1 per cent in April to £299,313, with annual growth decelerating to 0.4 per cent from 0.8 per cent.

The demand side weakened before the rate spike fully transmitted. The RICS UK Residential Market Survey for April registered a new-buyer-enquiries reading of minus 34 per cent, marking the sixth consecutive month of negative sentiment. The figure improved from minus 40 per cent in March, but an improvement from deeply negative to moderately negative is still negative. Tarrant Parsons, head of market research at RICS, saw little prospect of a near-term turnround.

Until there is a clearer path for inflation and borrowing costs, activity and sentiment look set to remain subdued, particularly across southern England and London where affordability pressures are most acute.

Nathan Emerson, chief executive of estate-agent trade body Propertymark, offered the industry’s framing — a market that has slowed without seizing.

The housing market remains active but measured. Buyers are continuing to view and make offers, but they are negotiating more carefully and remain highly conscious of value and monthly mortgage costs.

The lender side has been more guarded. Amanda Bryden, head of mortgages at Halifax, pointed to “resilience” in transaction levels, noting that approved mortgages were holding up despite the rate headwind. But the resilience argument rests on a timing quirk that is about to unwind. Tom Bill, head of UK residential research at Knight Frank, identified the cushion — and its expiry date.

The recent spike in mortgage rates will only put gradual downwards pressure on house prices as more favourable offers that predate 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.

Buyers who locked in mortgage offers at roughly 4.8 per cent before the strikes on Iran still hold valid quotes. Each week through May and June, a tranche of those pre-conflict offers expires, and the replacing quote comes in closer to 5.73 per cent. The effective mortgage rate facing new purchasers rises week by week, and the price indices — which lag offers by two to three months — have yet to reflect the full adjustment. Knight Frank has halved its 2026 UK house-price growth forecast from 3 per cent to 1.5 per cent, explicitly attributing the revision to the Middle East conflict and its effect on mortgage pricing.

Political risk has added a second layer of pressure that a cooling market did not need. Prime Minister Keir Starmer is fighting for his political future after heavy local-election losses triggered calls from more than 40 Labour MPs for his resignation. Britain now carries the highest government borrowing costs in the G7, a premium that feeds directly into the swap rates against which lenders price fixed-rate mortgages. Knight Frank’s Bill noted that Starmer-related uncertainty was “squeezing buyers, particularly in the capital.” The mechanism is straightforward: political instability widens the gilt premium; swap rates rise; mortgage rates follow; buyer budgets shrink again.

The regional divergence confirms that the rate shock is being absorbed along affordability lines — and the split is widening. London recorded an annual price decline of 2.1 per cent in March, while the South East fell 2 per cent. Both are regions where loan-to-income ratios run highest and where a 0.9 percentage-point rate rise adds the largest monthly payment increase in absolute terms. At the other end of the distribution, Northern Ireland posted 7.6 per cent annual growth; Scotland gained 4 per cent; and the North West rose 3.1 per cent — markets where lower average loan sizes and higher proportions of cash buyers insulate prices from short-term rate moves.

Knight Frank’s data put a finer point on the capital’s weakness: prime London transactions were down roughly 30 per cent year-on-year. When a housing market segments this cleanly by geography and leverage — with the most-mortgaged regions declining while cash-heavy regions climb — the transmission from monetary conditions into asset prices is visible in near real time. It is the kind of natural experiment macroeconomists usually have to simulate.

The broader economy is now corroborating the housing signal. UK unemployment rose unexpectedly to 5 per cent in the three months to March, while wage growth slowed, in what the Guardian described as the first snapshot of how companies are responding to the same Iran-war cost pressures that have driven up mortgage rates. Housing is rarely the first link in a macroeconomic tightening chain, but it is the most publicly legible one. For Britain in the second quarter of 2026, the price of a three-bedroom semi in Croydon is doing the work of a bond-yield ticker — transmitting a conflict 3,000 miles away into household balance sheets, one expired mortgage offer at a time.