House prices will go into reverse this year after the Iran war 'fundamentally changed' the outlook for the market, a leading estate agent has predicted.

In a report, Savills now expects a 2 per cent fall in prices for 2026, downgraded from a previous forecast of a 2 per cent increase.

It represents the latest damaging economic consequence of the conflict in the Middle East, which has disrupted energy supplies with global repercussions.

Rising oil and gas prices driven by the war are fuelling inflation, which is in turn putting pressure on the Bank of England to raise – or at least not cut – interest rates.

The change in rate expectations means lenders are already raising rates on mortgage deals.

Savills said: 'The conflict and the resultant rise in mortgage rates has fundamentally changed the outlook for the UK housing market.'

It acknowledged that a more protracted war could make the outlook even worse by leading to a sharper rise in inflation and, in turn, interest rates.

'This would result in a more significant short‑term pressure on house prices, followed by a more pronounced V‑shaped recovery,' the report said.

Lucian Cook, head of residential research at Savills, said: '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. Higher borrowing costs and weaker sentiment will weigh on demand through the remainder of 2026.'

Cook said red tape forcing landlords to sell – putting more property on the market – is adding to the 'downward pressure' on prices especially in parts of London and the South East.

However, he said other factors would offset these 'headwinds', including improved affordability compared with a few years ago.

The report is the latest to signal that the housing market has been dampened by the war.

A poll by the Royal Institution of Chartered Surveyors a few weeks ago also pointed to a subdued market.