Since the Office for Budget Responsibility (OBR) published its market update in March, energy prices and interest rates have risen sharply amid the Middle East conflict, reducing household spending power.
As a result, in its Economic and Fiscal Outlook, which was published alongside the Autumn Budget, the independent watchdog has raised its inflation forecast for 2027 from 2% to 3.4%. It has also downgraded its forecasts for house prices, property transactions and housing supply.
It still expects house prices and property transactions to rise over the next few years, but more slowly than had previously been forecast.
House price growth downgraded
The OBR is now predicting average UK house prices to rise by 2.1% in 2026 and 2.4% in 2027, rather than the 2.4% and 2.9% it was expecting in March.
Both increases are below inflation, so prices will fall in real terms, but annual growth is then forecast to recover to around 2.7% to 2.8% from 2028 as household incomes improve.
Mortgage costs and property transactions
Mortgage rates are already rising and, according to the report, the average interest rate on outstanding mortgages will go from 4% in 2026 to 5% by 2031.
Annual property transactions, though, are still expected to rise gradually from around 1.2 million in 2026 to 1.3 million by 2031 as housing turnover recovers and the number of homes increases.
However, total sales over the period could be around 4% lower than March’s predicted figure, as higher mortgage rates weigh on activity and housing stock grows more slowly than previously anticipated.
Housing supply forecasts cut by 190,000 homes
Housebuilders are also facing financial pressures, and the number of planning permissions being granted suggests that the supply of new homes will remain subdued.
Construction costs have risen faster than house prices at the same time as weaker buyer demand has limited developers’ ability to pass on those costs.
It means the OBR now expects 190,000 fewer net additions to the UK’s housing stock over the forecast period than it predicted in March.
Instead of a steady rise in the number of homes added from next year, it is forecast to fall from approximately 230,000 in 2025–26 to 220,000 in both 2026–27 and 2027–28, before gradually recovering to 260,000 by 2030–31.
Although the Government’s planning reforms are still expected to boost housebuilding over the longer term, the benefits are taking longer to materialise than previously anticipated.
And the new Your First Home equity loan scheme is likely to have only a marginal effect on housing supply because of its relatively limited scale, although it could push house prices a bit higher by stimulating demand.
Landlord taxes will push rents higher
In contrast to the sales market, the OBR is warning that higher landlord taxes could reduce rental supply and lead to a steady rise in rents over the longer term.
The latest two-percentage-point increase in income tax on property earnings comes on top of a similar rise announced in the 2025 Budget. Both are due to take effect in April 2027.
The OBR says that, together with a number of other measures introduced over the last decade, it could mean “potential landlords are less likely to enter the market”, and existing landlords could choose to sell up.
If rental demand then outstrips supply, the OBR says remaining landlords would gain greater scope to pass their higher costs on to tenants.
You can read the full OBR report here. The next forecast is expected in spring 2027, although a date has not yet been announced.
