London house prices declined 3.3 percent in the year to February 2026 according to UK House Price Index data published by HM Land Registry, marking an increasingly sharp divergence between the capital and the rest of the country at a moment when the effects of the US-Iran conflict are feeding into mortgage markets in ways that are upending earlier predictions for the property sector.
At the start of 2026, the major lenders and estate agencies were forecasting a year of modest but meaningful price growth across England, with Halifax projecting gains of 1 to 3 percent and Savills expecting around 2 percent. Those forecasts were built on assumptions of interest rate cuts emerging through the year as inflation moved toward target. The war in Iran, which began in the second quarter and has sent oil prices climbing, has disrupted that picture considerably.
Two-year fixed mortgage rates rose from 4.83 percent at the start of March to 5.83 percent by April 22 according to data firm Moneyfacts, a one percentage point increase in roughly seven weeks that has added materially to affordability pressures for prospective buyers and those remortgaging. Lenders are pricing in inflation risk from elevated fuel costs, and the Bank of England, which would ordinarily be expected to cut rates in a slowing economy, faces a more complicated inflation landscape that limits its room for manoeuvre.
London’s underperformance relative to the national average is not entirely new. The capital’s higher average prices make it more sensitive to mortgage rate changes, as small shifts in the cost of borrowing translate into larger absolute pound figures for buyers in markets where the average property price significantly exceeds the national norm. Outer boroughs and those with high concentrations of buy-to-let properties have been particularly affected.
By contrast, regions including Yorkshire and the Humber saw annual house price inflation of 3.9 percent in the same period, reflecting the more affordable starting point and the ongoing trend of people seeking lower-cost locations while working from home arrangements continue to provide geographic flexibility.
The RICS Residential Market Survey, which collects sentiment data from estate agents and surveyors, reported broadly positive signals at the start of the year but has since shifted in tone, with members increasingly warning that uncertainty around the Iran conflict and its economic consequences is weighing on near-term confidence among both buyers and sellers.
The picture for London’s property market later in 2026 will depend heavily on how quickly energy prices stabilise and whether the ceasefire framework with Iran translates into a more sustained easing of oil market tensions. Until that question has a clearer answer, the combination of elevated mortgage rates, stalled wage growth, and geopolitical uncertainty is likely to keep London price growth under significant downward pressure.
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