UK property investing: Houses, rates, and headaches

We wrote last year that the golden age of UK property was over, in a special report. Writing this year, we can see the gold leaf peeling off even further.

Official data for 2025 show the average UK house price rising by just 1.7%, well below headline inflation. This reinforced our belief that a well-diversified portfolio of financial assets remains a much more compelling choice for the years ahead.

Against stocks, house price growth looks especially sluggish. A simple 25% UK and 75% international equity mix rose 11.8%, excluding dividends. Meanwhile, the average UK home was worth less in 2025 than back in 2016, after accounting for inflation. By contrast, the equity portfolio delivered a real-terms capital gain of 39% over the same period.

Are there opportunities to buy the dip? In short, we don’t think so. The stars that once aligned for UK property between the 1980s and 2000s are unlikely to do so again. The past year has only strengthened that view. Four forces are doing the damage:

1. Weak wages are keeping a lid on prices

A sustained reacceleration in UK real wage growth seems hard to see. Real pay only regained its 2007 average in 2021. By 2025, it was just 2.4% higher than 18 years before.

We see little reason to expect significant near-term improvement in productivity growth (the increase in how much output each worker can produce over time), a driver of real incomes. This largely reflects the UK’s long-running failure to deliver structural reform.

2. Higher interest rates are set to stay

Mortgage rates fell from above 15% in 1990 to around 6% to 7% at the turn of the millennium, then to roughly 2% between the late 2010s and early 2022. That gave buyers more bidding power, without increasing monthly repayments.

With average fixed-rate mortgages hovering above 4% in the first quarter of 2026, there’s mathematically no scope for another spectacular double-digit rate drop. In any case, the economic backdrop doesn’t support a return to ultra-low rates.

Factors such as more frequent geopolitical shocks and political pressure to borrow more point towards higher and more volatile periods of inflation and interest rates. Mortgage rates of around 4% to 5% are likely to be the new normal.

3. Tax and regulation are increasingly hostile

The policy backdrop has become steadily more unfavourable for property investors, with a series of tax and regulatory changes – and even more so in the past few years. For example:

• A stamp duty surcharge on additional homes was introduced in 2016, and hiked again in 2024.
• The High Value Council Tax Surcharge – a new charge on owners of residential property in England worth £2m or more in 2026 – is due to apply from April 2028.
• The Renters’ Rights Bill started coming into force from May 2026, shifting the balance further towards tenants by ending ‘no-fault’ evictions, banning fixed-term tenancies, tightening rent increase rules, and restricting advance payments.

4. Scarcity is no silver bullet

The role of housing supply and demographics in driving house prices is sometimes over-egged. Current dynamics point away from a repeat of the rapid price growth seen in previous decades. Supply remains constrained relative to both past levels and government housebuilding targets, but growth has generally been stronger than during much of the last housing boom.

Although the government has persistently missed its housebuilding targets, the number of net additional homes in England has still climbed well over the lows of the 1990s.

Second-home ‘not-spots’ 

In England, local authorities gained the power to charge a double rate of council tax on second homes in April 2025. Similar powers have existed in Wales since 2017 and in Scotland since 2024. Early signs suggest this has added to the headwind of higher stamp duty. During 2025, house prices fell in 19 of the 25 local authorities with the highest density of second homes. By the first quarter of 2026, that number reached 20 of the 25 hotspots.

A cottage by the coast has often promised both lifestyle and lucre: cream teas today, capital gains tomorrow. That bargain now looks shakier. The more painful lesson is that “second-home hotspot” does not just mean sea views and cream teas: expensive parts of London with high second-home ownership have been among the weakest performers of all.

The hotspots that cooled

Prime London under pressure

In 2025, the average house price across the capital fell by 1.7%, with declines in 17 of the 32 boroughs. The sharpest falls were in some of the wealthiest boroughs: almost 14% in Westminster, and around 7% in Kensington and Chelsea. Seven boroughs saw declines of more than 5%. 2026 continues the trend, with London house prices falling a further 0.6% on average in the first three months.

Higher interest rates are a headwind for London, but they’re not the only drag. The capital has plenty of expensive flats — the property type most exposed to weak demand — and hybrid working has dulled the old premium attached to a short commute. Add weaker foreign demand, tax changes and sanctions into the mix, and the gloss has come off parts of prime London. The pied-à-terre no longer looks quite so bulletproof.

London loses momentum

No longer safe as houses 

Nationally weak price growth, sharp falls in London, and growing pressure in second-home hotspots suggest the market is still adjusting to a new environment. It’s unlikely the current pressures will ease in a way that restores the conditions behind the long property boom. Generals are often accused of fighting the last war, not the current one – and investors should beware of trying to invest in the last boom.

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