House prices will fall by two per cent for the first time since the financial crisis this year, according to Savills, which warned mortgage hikes as a result of the Iran war had “fundamentally changed the outlook for the housing market”.

The property giant was forced to revise down its property price forecast for 2026 after the onset of the Middle East conflict forced mortgage providers to pull deals at their fastest pace since Liz Truss’s mini-Budget.

Housing in London is poised to come under particularly strong downward pressure, falling some four per cent this year, thanks to higher mortgage rates clashing with a glut of supply.

Landlords have been selling former rental properties onto the market in record numbers, since a wave of fresh regulation and tax hikes – and higher mortgage costs – made buy-to-let home ownership considerably less affordable.

Taking into account the effects of inflation, which is expected to remain elevated at 3.9 per cent this year, house prices will fall by just under six per cent in real terms. Under the same forecast, real house prices in the capital will fall by some eight per cent.

The average two-year fixed mortgage rate has risen by roughly one per cent since February 2026, when the Iran war forced lenders to reevaluate the long-term path for interest rates.

House prices to recover in 2027

Mortgage providers had been offering two-year fixed loans at just 3.5 per cent before the war, in line with forecasts that the Bank of England would lower its central interest rate three times over 2026. Now, the lowest two-year product on the market is 4.4 per cent, while the average across all two-year products is 5.8 per cent.

Lucian Cook, head of research at Savills, said much of the downward in the real estate juggernaut’s forecast was the result of mortgages’ re-rating.

“Despite a robust start to the year for both price growth and activity, the rise in mortgage rates since late February has downgraded the short-term outlook,” he added. “Higher borrowing costs and weaker sentiment will weigh on demand through the remainder of 2026.”

Savills’ research predicted that the most significant downward pressure over the summer, when interest rates in the mortgage market are expected to be their highest. But house will start to recover from then on, the property group predicted, and are poised to rise by 2.5 per cent in 2027.

Should Savills’ prediction come to pass, a drop will mark the first time since the financial crisis that house prices have fallen by two per cent or more in a calendar year. The 2008 crash led to property prices falling by some 10 per cent, in what was one of the largest real estate corrections in financial history.

UK housing fell by 1.4 per cent over the course of 2023, after Russia’s invasion of Ukraine forced the Bank of England to hike interest rates by five per cent in less than two years.