Transcription
UK house prices fell in May, and in this video, I'll explain why the headline number is hiding three completely different stories. Because what happens to your property this year depends almost entirely on which of those three markets you're in.
Now, housing probably matters more to this country than any other single asset. Around 65% of UK households own their own home. Now, for most people, it's their largest asset by far. And for a growing number of younger people, it's the one they're no longer sure that they're going to reach. The share of 25- to 34-year-olds who own their own home has fallen from roughly 2/3 in the early '90s to about 1/3 today. Now, that's a generational shift, and it's precisely why every time house prices move, the politics get difficult very quickly. Any government that causes house prices to fall upsets the majority who own. Any government that keeps them rising shuts out the generation coming behind. It's an impossible position.
So, let me start with the overall question. Will UK house prices go down in 2026? Nationally, I think they probably already are, and they'll continue to do so, at least in real terms. The Nationwide House Price Index showed annual growth of just 1.7% in the year to May. Now, that sounds positive until you put it next to inflation running at around 2.8%. So, whether you use the Nationwide figure or the ONS and Land Registry measure, which showed 0% growth in the year to March, prices are falling in terms of what your money actually buys. But that national average is almost meaningless right now. And that's because inside it are those three markets moving in completely different directions?
Now, before I get into those markets, let me give you 30 seconds on why we're here. The story goes back to February of this year to a conflict in the Middle East that pushed oil prices sharply higher. I've covered the full mechanism in the Bank of England video linked below, so I won't go through it all again, but the short version is that rising energy costs fed into inflation. That stopped the Bank of England cutting rates the way markets expected, so that a two-year fixed mortgage that cost roughly 4.8% in March now cost closer to 5.7. That's a shift of nearly a full percentage point in about 3 months, and it comes at a moment when around 1.8 million people are on fixed-rate deals which are due to expire over the course of this year alone.
If you own property in Liverpool, Manchester, Glasgow, or Edinburgh, there's some encouraging news here. And it's not that prices are cheap, it's about the direction of travel. Measured against London, these cities have been quietly catching up. London's lead over the rest of the country peaked back in 2016, and ever since prices outside the capital have been growing faster, steadily closing the gap. Manchester, Glasgow, and Edinburgh have closed it the most, each gaining well over 10 percentage points on London since 2016. London hasn't fallen, the rest of the country has simply been rising faster. And here's the story behind that. Since 2021, UK earnings have risen roughly 25% while house prices nationally rose between 10 and 15%. In the northern cities, that shift really matters, not because wages here outpaced prices locally, but because their prices were never stretched as far as London's in the first place. House prices in Belfast, for example, are roughly five times local earnings. Compare that to London at 10.6 times. The same interest rate shock cost a Belfast buyer roughly half what it cost a London buyer in cash terms. And that affordability headroom is showing up in the price data. You can see it here. The national price to earnings ratio has been falling since 2021, back towards its long-run average. Northern Ireland is up nearly 10% year-on-year, the strongest performance of any UK region. Liverpool is up around 3%. Now, these aren't overheating markets. They're simply catching up from a base where they can still afford to.
But, I think there's a second driver that most people underestimate. Legal & General found that family gifting to home buyers reached a record 9.2 billion pounds in 2024. And that supported 335,000 property purchases. And that's roughly 42% of all homes that were purchased by people under the age of 55. The average contribution was around 27,400 pounds. Now, 27,000 pounds is about 5% of the average London home, but it's roughly 15% of the average Liverpool home. So, equity which is built up in southern property over the past two decades is slowly flowing northward through family gifts. It's a structural transfer of wealth that quietly props up northern buyer demand, regardless of what local incomes are doing. And these markets were also more insulated from the rate shock, simply because the pound cost of a mortgage is so much lower when prices are lower.
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Now, let's talk about what I think is an underreported story in UK housing. If you own a leasehold flat in London, and there are millions of people in this position, you've probably had a very difficult decade. And the headline index isn't really telling your story. The ONS data shows London prices fell 2.1% in the year to March 2026. Now, that's the eighth consecutive month of annual falls in the capital. But, the average covers something much more specific. If we look at Kensington and Chelsea, the average flat has fallen roughly 14% in nominal terms since 2016. In Westminster, it's down nearly 20%. Now, these aren't inflation-adjusted figures. That's cash which is gone, and that's before you accounted for a single year of rising prices. If we look at real prices, it would be much worse. And flats in Kensington and Westminster aren't outliers. They're just the extreme end of a pattern that runs across the whole country. Nationally, over the last 5 years, house prices rose around 24% while flat prices rose just seven. Now, that gap between the two has reached a 30-year high. You can see it within a single city. In Greater Manchester, I looked this up directly on the land registry data. Semi-detached houses rose 2.4% in the year to March, whereas flats fell 2.2%. Same city, same year, often the same postcode, but what you own now matters more than where it is.
There are several factors driving this. Let's start with service charges. Now, according to Hamptons' research, the average service charge on a leasehold flat across England and Wales has now passed £2,400 every year. In London, it's closer to 2,800. Now, both of those have been climbing steadily for a decade, but London's is up 65%. That's about 1 and 1/2 times the rate of inflation over the same period, and of course it's still rising. Then there's the situation around legislation for leaseholds. Now, the government's been promising leasehold reform for years, and the Leasehold and Freehold Reform Act finally passed in 2024, but the key protections for existing leaseholders are only being phased in slowly, with many of the most important changes still not in force. The caps on ground rents and the shift towards common hold are still slowly working their way through the system. So, leasehold owners are in a holding pattern, and that uncertainty itself suppresses valuations. And then, there's the proposed energy performance certificate C rating requirement for rental properties by 2030. Retrofitting a flat is often harder than a house, and that's because many up grades like external wall insulation or communal heating changes have to be agreed and delivered at block level, not just by one leaseholder acting alone. That creates a future cost and coordination risk for older flats that investors are increasingly starting to price in, even if the full impact hasn't yet shown up across the market.
So, what about everything in between those two extremes? This is the mid-market houses. This house in fact. So, that's the commuter belt, the cities that aren't in either of these columns. Now, that's the third market, and I think that one's the most deceptive. Now, on the surface, it looks absolutely fine. Prices are roughly flat, there are no alarming headlines, but flat in nominal terms against inflation of 2.8% means you're losing roughly 3% a year in real terms. And most people aren't even thinking about it in real terms as they should. What's holding these prices up isn't strong underlying demand, it's cash. Around a quarter of all UK transactions are now cash purchases. That rises to around 30% in the northeast and also the southwest, and it falls to about 20% in London. Equity-rich downsizers, inheritors, people who move capital out of cities, they set the marginal price. And their presence makes these markets look more resilient than they probably are. But the underlying demand picture is weak. The Royal Institution of Chartered Surveyors reported the sharpest fall in new buyer inquiries since 2023 in March this year, with the index strength deep in negative territory in April. Buyers simply aren't confident. And in a market held up by cash rather than demand, prices can move faster than you'd expect when that sentiment shifts. Remember too that the rate-cutting cycle that most people were counting on has stalled. The bank held at 3.75% for the third time in April, and one of its own committee members, Huw Pill, voted to raise rates. So the cavalry, in the form of monetary policy and Andrew Bailey, is not arriving anytime soon.
So how do you work out which of those three markets you're in? I'd say here are five questions which will help you judge that. The first one is what's the local price-to-earnings ratio where you live. If the typical home costs more than roughly nine times local earnings, and that ratio hasn't really improved since 2021, you're probably in a stalling or falling market. London is at 10.6 times, the northeast is at five, and that gap explains almost everything. Second, is local employment actually growing? London's payrolled employment fell by about 1% in January 2026 compared with a year earlier. Now that's pretty unusual for a city that most people assume is permanently thriving. Northern Ireland grew by about 1.2% over the same period. So employment now follows affordability, not the other way around. Third, and I think you probably guessed this one by now, is it a flat or a house? Fourth, how fast is new supply being added to your area? England added around 208,000 net new dwellings in 2024 to 25. Now, that's the third consecutive year where the number of new dwellings declined, and it's also far short of the government's own target of 300,000 plus homes a year over this parliament. But, that hides enormous local variation. Some areas are adding stock fast enough to cap price growth, others are barely building at all. Fifth, are you in an area dominated by cash buyers? Around a quarter of all UK sales are cash, but the range runs from about 20% up to about 30%. Now, the more cash-heavy your market, the more insulated it is from rate changes, and that's because those buyers don't have mortgages.
So, what do I actually think about all of this? Well, my view is that the national average house price is probably going to keep drifting lower in real terms, certainly, for the rest of 2026 and into 2027. I don't think we'll see a huge crash. Mortgage arrears are still very low. Household debt to income is at its lowest level in over two decades, and cash buyers, which remember make up a quarter of all transactions, are going to keep putting a floor under prices. But, I also don't think that the rate cuts most people were counting on are coming fast enough to change the picture this year.
Now, if I owned a leasehold flat in inner London, I'd be thinking seriously about whether it's the right asset to hold into retirement. The service charge trajectory alone changes the economics of that choice, and that's even before you factor in 2030 and the change, potential change in energy certificates. If I was looking at northern cities with capital to deploy, I think the fundamentals are genuinely better there. Affordability's got room to grow, employment is growing, and of course that family gift money is flowing in a northerly direction. I'd probably be a buyer there before I'd be a buyer in London, for example. And if you're renting, which more and more people are, I'd say this, the flexibility of renting in 2026 isn't a disadvantage that people assume. What it means is that you can move to wherever the market makes sense for you, your job, your family, rather than being locked into the wrong place, which you often are if you've bought a house. But if you did want to go deeper on whether property or stocks makes more sense as an investment, there will be a card with a link to that video, which is displayed somewhere near me right now. And don't forget the offer from Trading 212, where you can claim free fractional shares worth up to £100. Just open an account, verify, fund it, use my name as the promo code, which is Raman, r a m i n, and you'll find a link to that in the description below. And do let me know in the comments, which of those three markets are you in? And do you plan on switching from one to the other? And as always, thank you for listening.