Housing Market Outlook & Forecasts
The outlook for the UK economy and, by extension, the housing market is uncertain over the next year or so as we deal with the fallout of the 2026 Middle East conflict. The current market expectations (covered off in the latest Bank of England Monetary Policy report) is that base rates will rise modestly over 2026 to around 4.25% (0.5 percentage points higher than the current rate) and hover around that level for the next few years, possibly coming back down by mid-2027.
That would likely give us a subdued housing market, with a probable small reduction in sales and stagnant prices. However, there are a range of scenarios that the Bank of England has modelled, all with very different outcomes. While Scenario B largely follows the pattern above, a more optimistic Scenario A sees the interest rate rises quickly reversed and the base rate gently moving back down to c.3.5% by the end of 2027 (based on a short-lived energy shock). The more pessimistic Scenario C anticipates a spike in inflation that is sustained based on an energy price shock pushing up global export prices and causing an inflation spiral. This sees base rates climb back over 5% by the end of 2026 and remain around 5% into next year and the start of 2028.
Our sales market forecasts need to take account of this shifting economic backdrop. The market now looks like it will not be moving along at a steady pace as it has done in 2023-25. Under all modelled scenarios above, base rates rise, which we reflect in our forecast scenarios below. Our current central forecast is that house price growth is 0% in Scotland this year, with a downside forecast of -2.5% if inflation and base rates spike harder and faster. We do not anticipate a ‘house price crash’, even when spikes in inflation and base rates happened during the Liz Truss premiership in late 2022, the main hit was in transactions rather than prices as people just took themselves out of the market. If conditions are more benign, we think average prices may rise 2%. Going forward, price growth looks like it will be stunted but still positive post-2027 and in line with recent historical averages.
Transactions now look likely to drop back in 2026, possibly back to 2024 levels, which would be a decline of around 5% YOY. A more pessimistic forecast would see them go back to 2023 levels (after being impacted in a similar way to the previous sharper base rate rises in 2022). Our optimistic forecast sees sales at a similar level to 2025.
Recovery should happen in subsequent years, but the pace of this recovery will be determined by the pace of change this year.
In terms of the rental market, as expected, rental growth has been limited at the start of 2026 due to a notable return of rental stock back onto the market. Rising base and mortgage rates, however, could mean increased demand for rental properties again, pushing rental growth, although the First Homes Fund may counterbalance this to some extent. Affordability pressures have also kept a lid on rents in recent times and the lack of economic and earnings growth may be another factor limiting rent inflation. We expect it to be modest, around 2-3% up over 2026.
