UK Housing Market Waits on Washington

The US mid-term elections are likely to have a bigger impact on the UK housing market than last month’s Budget. How very 2026.

In summary, a poor set of results for Trump was taken as a rebuke of his foreign policy, and financial markets are increasingly pricing in a deal with Iran. That prospect pushed down the oil price by 16% last week and lowered inflation expectations. As a result, some lenders are now trimming their fixed-rate mortgages.

A lasting peace deal would accelerate a decline in rates, with the impact eclipsing anything John Healey announced in October, including the Your First Home scheme, biodiversity net gain changes and the first-time buyer ISA.

Prices and transaction volumes have come under pressure because of higher mortgage costs since the conflict started in February. Last week Lloyds reported that UK house prices fell by 1.2% in the year to October, which was the widest decline in three years. Mortgage approvals in September were 19% lower than last year, Bank of England data shows.

The data underlines how events in Washington, not Westminster, have shaped the UK housing market this year.

Hopes of a diplomatic solution are building, as I discuss on the latest episode of Housing Unpacked with Damian Pudner, economist and co-founder of the Great British Think Tank.

“The American midterms have changed the political backdrop, and Trump has much stronger incentives now to bring the conflict towards some kind of resolution,” said Damian. If that happens, “oil prices will stabilise at a much lower level, inflation expectations will fall across the globe, and that will hopefully bring interest rates down”.

Swaps Edge Lower

Market indicators have cautiously moved in the right direction this week. Five-year SONIA swap rates closed at 4.52% on Monday although they climbed above 4.6% on Wednesday, partly due to nerves over the likelihood of a peace deal. That compares to 4.77% three weeks ago.

Meanwhile, investors have been betting on approximately three rate hikes in 2027, as opposed to an assumption of almost four at the end of October.

Damian believes that outlook is still too hawkish, and the Bank of England should look through the oil price shock.

“I’m not seeing any feed-through into wages or particularly strong inflation expectations rising in financial markets,” he said. “It seems a bit more of an insurance policy that they’ve raised rates by a quarter of a percent to 4%. But I do think it was a mistake and I think they should have held the line.”

Listen to the podcast to hear more about Damian’s alternative Budget, his views on an early general election, what he heard on the ground in the Middle East last week, and what factors borrowers should currently weigh up when choosing a mortgage.

Prime Under Pressure

Prices in prime London markets remain under pressure for now, despite the fact there were no tax increases directly affecting the sales market in this year’s Budget.
Average prices in prime central London fell 2.1% in the year to October, which means they have been declining on an annual basis for three and a half years.

As well as higher borrowing costs, the lack of a credible replacement for the non-dom regime and high rates of stamp duty are keeping downward pressure on prices in higher-value parts of the capital. 

“There is a reasonable amount of clarity on the horizon now that the Budget has happened and the mood music in the Middle East is de-escalatory,” said Stuart Bailey, co-head of the London Private Office. “Despite the upfront stamp duty costs (which have a significant impact in a stable growth market), this period of relative calm means buyers can increasingly make longer-term decisions.”

Rising mortgage rates are beginning to squeeze buyers in prime outer London (POL), which mirrors more closely what has happened to mainstream UK house prices.
Average prices in POL fell by 0.7% in the year to October, which was the steepest annual decline since June 2024.

Whether that decrease widens or narrows depends heavily on Donald Trump’s next move.