UK house prices saw their biggest monthly drop since June 2025 last month, as the escalating Middle East conflict and a sharp rise in borrowing costs began to bite. Nationwide reported a 0.6% decline in May, the first monthly fall since December, pulling the average property value down to £278,024. The annual rate of house price inflation also slowed markedly, dropping to 1.7% from 3% in April. Economists polled by Reuters had forecast a 0.2% decline.
The figures mark a clear reversal for a market that had shown unexpected resilience at the start of the year. Robert Gardner, Nationwide’s chief economist, said the loss of momentum was “to be expected” given the uncertainty unleashed by the Iran conflict. “Consumer confidence has weakened noticeably since the start of the conflict, with GfK’s headline index falling to its lowest level since late‑2023 in April, with only a marginal increase in May.” The GfK reading for May stood at -23, underscoring the depth of sentiment. Gardner also pointed to a sharp fall in new buyer enquiries reported by the Royal Institution of Chartered Surveyors in March, the weakest since 2023, followed by a reading that remained deep in negative territory in April.
Expert reaction: a market losing momentum at the wrong time
Tom Bill, head of UK residential research at Knight Frank, described the May drop as “further evidence that the housing market slowed down at precisely the time of year when you would expect momentum to be building”. He predicted minimal house price growth in 2026, warning that borrowing costs would continue to erode spending power as mortgage rates agreed before the Middle East conflict gradually expired. “With the Bank of England likely to sit on its hands for the foreseeable future, we expect minimal house price growth in 2026, with uncertainty around the Budget and ideological direction of the government likely to keep a lid on activity,” he said.
Nathan Emerson, chief executive of Propertymark, noted that stable prices could provide much-needed certainty after a prolonged period of economic volatility. He said buyers who need to move were continuing to act decisively, particularly where mortgage rates had stabilised, and supply remained constrained. “Many households are continuing to carefully assess affordability before making decisions, particularly as mortgage costs remain higher than many borrowers have become accustomed to over recent years,” Emerson added.
On the ground, estate agents are reporting a more cautious, price-sensitive environment. Amy Reynolds, head of sales at Richmond estate agency Antony Roberts, said demand for well-priced, high-quality homes was holding up, but buyers were not stretching to make offers they believed would be rejected. “In certain price brackets, buyers have the luxury of choice and vendors need to be mindful of this. While the wider economic backdrop may temper the pace of growth, we are seeing a more price-sensitive market where realism and accurate positioning are key.”
How rising borrowing costs and economic uncertainty are squeezing affordability
The sharpest headwind facing the housing market is the jump in borrowing costs triggered by the Iran war. Swap rates, which underpin fixed-rate mortgage pricing, have risen in recent months, driving up the cost of new home loans. Although Nationwide’s Gardner noted that swap rates remained “well below the highs reached in 2023 and are broadly in line with levels prevailing in 2024”, the impact on affordability has been immediate. Average mortgage rates climbed steadily after the conflict began, and despite a dip at the end of last week on hopes of a US-Iran ceasefire breakthrough, experts warned the trend could reverse.
The broader economic picture only deepens the pressure. The UK economy faces a potential £35bn hit and the risk of recession this year because of the Iran war fallout. EY has forecast that the conflict will reduce UK GDP growth by 0.5 percentage points in 2026, slashing it to 0.8% from a pre-conflict estimate of 1.3%. The OECD has revised its 2026 growth expectation down to 0.7%, while the IMF now forecasts 0.8%. Meanwhile, inflation is rising again: the Consumer Prices Index climbed to 3.3% in March, complicating the Bank of England’s task. The next monetary policy decision is scheduled for 18 June, and while some analysts predict rates could rise, others expect them to be held or cut later in the year. The uncertainty alone is enough to chill housing market activity.
Martin Beck, chief economist at WPI Strategy, said May’s fall “should not be overinterpreted, but it does underline the pressure facing buyers”. He pointed to weak consumer confidence, sluggish income growth and mortgage rates that remain “far above the ultra-low levels seen for much of the last decade-and-a-half”. Beck added that the US-Iran ceasefire and recent diplomatic developments had reduced the risk of a more severe shock to inflation and borrowing costs, but the headwinds made it “hard to see house prices returning to consistent growth in the near-future”.
Consumer spending growth, a key driver for housing demand, is expected to slow to just 0.3% in 2026, down from a pre-war estimate of 0.9%. Even the manufacturing sector, which has held up relatively well — the UK manufacturing PMI remained steady at 53.7 in May — is facing high input cost inflation driven by the closure of the Strait of Hormuz, which has disrupted global oil and gas trade. The Eurozone manufacturing PMI fell to 51.4 in May, reflecting broader weakness.
For first-time buyers, conditions are now the most challenging since the financial crisis, according to the boss of Britain’s largest housebuilder. Rising interest rates, higher student debt and a squeeze on real wages are combining to make deposit saving exceptionally difficult, with many renters spending a large portion of their income on housing. Government schemes such as the First Homes Scheme and the Lifetime ISA remain available but the support landscape is evolving, leaving many prospective buyers in limbo.
Gardner, however, offered a note of cautious optimism. He said housing affordability had been improving steadily in recent years thanks to income growth outpacing house price growth by a wide margin and a modest decline in borrowing costs. “While market interest rates have risen in recent months, the impact on affordability has so far been modest,” he argued. “This provides some confidence that, if the latest shock passes relatively quickly, and energy prices normalise in the quarters ahead, any near-term softening in the housing market will also prove short lived.”
That view was echoed by WPI Strategy’s Beck, who noted the recent fall in mortgage rates on ceasefire hopes. But with the conflict far from resolved, domestic political uncertainty — including potential leadership changes and unclear government direction — continues to weigh on sentiment, ensuring that buyers and sellers alike are treading carefully.
