Signs of life in the UK housing market

UK house prices returned to growth for the first time in four months in June, Lloyds reported yesterday. The 0.2% gain brings the annual growth rate to 0.6%.

While that’s lacklustre, it does suggest the market is beginning to turn more positive after mortgage rates rose following the conflict in the Middle East. Lenders granted just 56,205 mortgages to homebuyers in May, down from 66,034 the previous month, according to Bank of England data released last week. That was the weakest reading since late 2023 and illustrated how vulnerable the market had become before the US and Iran agreed a deal to reopen the Strait of Hormuz.

Mortgage rates have eased on the back of falling oil prices, which should pave the way for a measured recovery in activity following the summer. That said, any recovery is likely to remain fragile in the face of domestic political risks. The Office for Budget Responsibility produced its annual assessment of the long-term outlook for public finances yesterday, which showed that public debt is on an “unsustainable path”.  

The report came with a warning that raising taxes alone can’t be relied upon to put the public finances on a more sustainable trajectory, yet we’ve heard little from Andy Burnham’s camp as to how it might cut spending. As we’ve seen with successive governments, failing to convince investors that public spending can be reined in has the potential to push mortgage rates higher, and the seemingly insatiable appetite to raise various property taxes without engaging in proper reform threatens to weaken activity further.

Fiscal sustainability

Global luxury housing markets continued to record annual price growth in the first quarter of 2026, but momentum moderated, according to Knight Frank’s new Prime Global Cities Index (PGCI). Across our 46-city basket, prime prices rose by 2.0% over the 12 months to Q1 2026, down from 2.9% in Q4 2025 and 4.0% a year earlier.

Tokyo was the standout annual performer in Q1 2026, with prime prices rising 44.4% over 12 months. However, the city also recorded a quarterly fall of 8.6% – the weakest three-month result in the index. The combination confirms the scale of Tokyo's recent outperformance while signalling a clear cooling in momentum.

That may have further to run. Japanese borrowing costs surged to their highest in 30 years yesterday after investors sold off government bonds on concerns over the sustainability of the government’s spending plans. Last month, Prime Minister Sanae Takaichi announced a sprawling US$2.3 trillion spending plan for the next 14 years that included massive investments in Artificial Intelligence and semiconductors, alongside defence, space and shipbuilding.

Strength in Asia

Asian markets dominate the upper end of our PGCI. Tokyo ranked first, followed by Manila (19.9% annual growth), Seoul (11.3%), Singapore (9.8%) and Mumbai (8.2%). Bengaluru also featured in the top ten, with prices up 5.2% over the year.

The data points to continued depth across parts of Asia's prime residential markets, although the quarterly numbers reveal a more varied picture. Seoul recorded the strongest three-month gain at 5.4%, followed by Manila (3.3%), Bengaluru (3.0%), Mumbai (2.5%) and Singapore (2.4%). By contrast, Tokyo's quarterly decline means the region's leadership is no longer simply a story of broad-based acceleration.

The breadth of market growth remains positive, but not emphatic. Of the 47 cities tracked, 30 recorded positive annual growth and 17 saw prices decline. On a quarterly basis, 28 markets rose, 18 fell and one was unchanged – underlining a more uneven short-term pattern.  The weaker end of the ranking is concentrated in Canada and mainland China. Shenzhen recorded the steepest annual fall at -11.9%, followed by Vancouver (-10.4%) and Toronto (-9.5%). London also remained in negative territory, with annual prime price growth of -4.0%.

Working through

Annual growth in the Prime Global Rental Index slowed to 2.8% in Q1 2026, down from 3.0% in the final quarter of 2025. The latest reading remains well below the double-digit rates recorded in 2022, when the index peaked at 11.2% annual growth in Q1 2022.

The moderation confirms that the sharp repricing of prime city rents has largely worked through the system. The index is still rising, but at a pace more consistent with a late-cycle rental market: demand remains resilient, supply constraints persist in many cities, but affordability pressures are limiting the speed of further rental growth.

Sydney leads the ranking, with prime rents rising 10.6% in the year to Q1 2026. The city also recorded the strongest three-month performance, with rents up 5.3% over the quarter, underlining the strength of near-term momentum. New York ranks second, with annual growth of 7.4%, followed closely by Tokyo at 7.2%. Both markets continue to show firm demand, while Melbourne, up 5.4%, and Hong Kong, up 4.2%, complete the top five.

At the other end of the ranking, Toronto remains the weakest market, with prime rents falling 3.2% over 12 months and 2.6% over the quarter. Auckland also remains in negative annual territory, with rents down 2.3%, although its three-month growth of 3.6% points to a potential turn in momentum.

In other news…

Lack of data puts England’s ‘mansion tax’ valuations at risk (FT).