London’s housing market is experiencing its most sustained period of stagnation in years, with average house prices in the capital falling 3.3% annually in the twelve months to February 2026, a sharper decline than any other English region at a time when the national picture had briefly appeared to be stabilising.
The combination of elevated mortgage rates, the inflationary impact of the US-Iran war on energy costs, and political uncertainty at Westminster is producing a toxic set of conditions for buyers and sellers alike, particularly in a city where affordability was already stretched before any of the current headwinds emerged.
The Royal Institution of Chartered Surveyors painted a bleak picture in its April survey, with new buyer enquiries falling to a net balance of minus 39% nationally in March, the weakest reading since August 2023. Agreed sales dropped from minus 13% in February to minus 34% in March, the softest figure since the summer of 2023. For house prices, the net balance fell to minus 23% in March, down from minus 14% in February and minus 10% in January, indicating an accelerating downward trend across three consecutive months. Near-term price expectations came in at minus 43%, a dramatic fall from minus 19% in February. RICS head of market research Tarrant Parsons stated plainly that “activity and sentiment look set to remain subdued, particularly across southern England and London where affordability pressures are most acute.”
The mortgage rate picture is the most immediate problem for London buyers, given the city’s dependence on high loan-to-value lending given the sheer scale of purchase prices involved. The average two-year fixed mortgage rate rose from 4.83% at the start of March to 5.67% by early May, according to data from Moneyfacts. The five-year fixed equivalent moved from 4.95% to 5.69% over the same period. Those increases follow the Bank of England’s decision to hold its base rate at 3.75% rather than cut further, as oil price inflation driven by Strait of Hormuz disruption has kept the monetary policy committee from easing. Financial markets have shifted from pricing in rate cuts to pricing in between two and three quarter-point increases before the end of 2026, which would push five-year fixes toward 6% and further erode purchasing power in already expensive markets.
Halifax data reinforced the direction of travel, reporting that UK house prices fell 0.5% in March and a further 0.1% in April across consecutive months. Christopher Clark, a chartered surveyor at Ely Langley Greig, captured the prevailing sense of uncertainty among practitioners: “It’s impossible to know what is happening to the residential market at the moment. Only time will tell whether the Middle East conflict escalates or reaches a resolution, and the outcome of that war will determine how the market performs in the months and possibly years to come.”
The rental sector presents its own set of pressures, layered on top of the sales market deterioration. Landlord instructions have remained consistently negative throughout 2026, with the March RICS survey recording minus 27% on that measure, pointing to a continuing reduction in available rental stock as landlords exit the sector. The Renters’ Rights Act has accelerated the exit of smaller portfolio landlords who face regulatory complexity alongside higher tax burdens. From 2027, the basic rate of tax on rental income rises from 20% to 22%, and the higher rate from 40% to 42%, making the investment case structurally weaker. Many landlords who locked in 10-year fixed-rate buy-to-let mortgages at the ultra-low rates of 2016 are now rolling onto current market rates, crystallising a dramatic jump in their cost base that no rent increase is likely to fully offset.
Despite all of this, around 84% of landlords reported being profitable in the Resolution Foundation’s most recent survey, and current rental yields across London sit at approximately 7%, higher than in most prior periods when measured against current capital values. That figure is partly a reflection of how far sales prices have softened relative to rents, which have continued to rise even as the pace of growth has moderated. RICS near-term rental expectations remained positive at plus 29% in March, meaning the supply squeeze is expected to keep pushing rents upward even as affordability limits what tenants can actually absorb.
For first-time buyers in London, the practical reality is stark. With average house prices in England at £290,000 nationally and London sitting at a multiple well above that figure, the requirement for a deposit on a property financed at 5.67% over two years represents a monthly commitment that a rising share of households simply cannot service on current income levels. Sarah Coles of AJ Bell put it directly: “Life is likely to get even tougher for sellers in the coming months, as mortgage rates threaten to keep rising and sentiment cools.” The one sliver of context that prevents the picture becoming entirely bleak is the RICS 12-month sales expectations figure, which remains positive at plus 2%, suggesting practitioners still believe conditions improve once the current macro uncertainty resolves. Whether that resolution comes in 2026 or is deferred further into 2027 depends almost entirely on factors happening in the Middle East rather than on Downing Street or Threadneedle Street.
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