Green shoots after a soft end to 2025

The UK housing market closed 2025 on a downbeat note. Average UK house prices dipped 0.4% during December, trimming the annual growth rate to just 0.6%, according to Nationwide figures published last month.

This is unsurprising given all the uncertainty leading up to the Budget at the end of November. All in all, the mainstream housing market had a resilient year; stability returned fairly quickly following the volatility caused by the changes to stamp duty during the spring. Since the summer, lenders have been granting roughly the same number of mortgages to homebuyers each month as they were during the year leading up to the pandemic.

Rate cuts

Mortgage lending did slow a little in November. Approvals data from the Bank of England published on Monday showed lenders granted 64,500 loans to homebuyers – down 500 from the previous month. That follows a similar dip in October.

The outlook has improved in the weeks since. Inflation fell much more than expected during November, according to official figures published last month. That prompted a flurry of mortgage rate cuts through December and 3.5% fixed rates may arrive by spring.

"It looks like many buyers put plans on hold until after Christmas," Simon Gammon, Managing Partner of Knight Frank Finance told the Independent on Monday. "That said, mortgage rates continued to ease through December, and anecdotal evidence from our brokers suggests that some pent-up demand should be released as we move towards spring. The lenders begin the year with fresh targets and we expect the larger lenders to be most aggressive in cutting rates in the first weeks of January.”

HSBC was the first to announce reductions across its range on the 2nd of January.

Bounce back

The Budget clearly impacted sentiment in every corner of the economy, but while many of the measures announced were unpopular, investors took the display of fiscal restraint as a positive sign for 2026. Investors dialled up bets on rate cuts from the Bank of England and stocks have since edged higher – the FTSE 100 closed at a record high yesterday. We probably won't know the scale of the bounce back for another month or two, but the early signs are relatively positive.

The UK Services PMI from S&P Global registered its eighth successive month of growth in December. The 51.4 reading – where anything above 50 marks an expansion – remains below the long-run trend of 54, but respondents noted tentative signs of a recovery in client confidence:

"The most positive development was a renewed upturn in new business intakes, following a slight decline during November," said Tim Moore, Economics Director at S&P Global Market Intelligence. "Modest growth of incoming new work was attributed to tentative signs of a recovery in client confidence after an extended period of pre-Budget gloom. Order books were also supported by a marginal rebound in export sales."

Higher-than-expected volumes of new business contributed to an increase in backlogs of work for the first time since May 2023.

Younger buyers

The cold initial days of January are a popular time to search for a home in sunnier climes, and Kate Everett-Allen this week took a deep dive into the outlook for Mallorca. The buyer profile has transformed in recent years; today’s purchasers are younger, globally mobile professionals, often in their thirties and forties, drawn by lifestyle, safety and flexible working. The median age of Knight Frank’s prime buyers on the island has fallen to around 46.

Recent policy changes have buoyed investor sentiment, while extensive infrastructure investment is elevating the island’s global reach. Palma’s €550 million airport expansion, alongside the regeneration of the Paseo Marítimo waterfront and the new Club de Mar superyacht marina is reshaping mobility and enhancing long-term appeal. The island now has links to 166 destinations served by 52 airlines.

Despite periodic national rhetoric around higher taxes for foreign buyers, such measures remain unlikely. In contrast, the Balearic Government has adopted a pro-investment stance, raising the wealth-tax threshold from €700,000 to €3 million in 2024. We anticipate the next few years will bring steady, sustainable growth, with prime prices projected to increase by roughly 2% to 4% in 2026.

In other news...

UK to Pass Population Tipping Point in 2026, Think Tank Says (Bloomberg), London office shortage forces big companies to stay put (FT), Help to buy must be revived for Starmer to keep his housing promise (Times), and finally, Saudi Arabia Opens Property Market as MBS Courts Overseas Investors (Bloomberg).