House prices rose by 0.1% in July, according to Nationwide.

This meant annual growth reached 1.8% in July, down from 2.2% in June. This is in line with our forecast, which anticipated that higher mortgage rates as a result of the Iran war would cause house prices to fall slightly during 2026.

Higher mortgage rates are affecting market activity and price growth, with volatility in rate pricing creating added uncertainty.

Financial markets are continuing to price in two base rate rises over the coming months and this is likely to remain the case until a lasting resolution to the Iran conflict is found. Mortgage rates are therefore unlikely to fall back to a level that unlocks price growth in the short term.

Economic forecasts are less pessimistic, expecting the Bank of England to hold rates steady until rate cuts can resume in 2027.

Oxford economics expects that the Bank of England will keep the bank rate unchanged at 3.75% well into 2027. This is driven by the Bank balancing near-term inflationary shocks caused by the Iran war against longer-term fragility in the UK labour market. Inflation is forecast to fall back towards the target level of 2% in 2027, again assuming a lasting and permanent resolution to the ongoing war. If this is right, the market is likely to remain subdued but with the prospect of a stronger market next year.

The challenging mortgage market is feeding into lower levels of activity. Mortgage approvals for house purchases ticked up slightly in June, but remain -12% below the 2017-19 average. Completed transactions, which typically lag mortgage approvals by 1-2 months, were also -6% below the 2017-19 average in June. 20CI reported that sales agreed (net of fall throughs) were 3% above the 2017-19 average for July after being -15% below it the previous month. Although, a return to the 2017-19 average in July, which is typically a slower month, does not yet represent a recovery in the sales market. Levels of supply remain high and sales are slow, with Zoopla reporting in June that three fifths of homes placed on the market since the start of the year were yet to sell.

More localised house price data from April shows that Scotland and the North West had the greatest price growth, particularly East Ayrshire (12.6%), East Dunbartonshire (10.6%) and East Renfrewshire (9.0%). The weakest growth was in Kensington and Chelsea (-8.3%), Hastings (-7.4%) and Newham (-6.9%).