UK House Prices Decline as Iran Conflict Uncertainty Weighs on Market Sentiment

Average UK house prices contracted by 0.5% in March, according to Halifax, as mortgage rates climbed higher amid geopolitical tensions stemming from the Iran conflict, which have dampened buyer demand. The average property price now stands at £299,677, whilst annual growth has also decelerated, the nation’s largest mortgage lender reported.

The monthly decline reverses a 0.3% increase recorded in February, which preceded the outbreak of hostilities that have driven energy costs higher and intensified concerns that inflation could accelerate. Market participants have grown increasingly pessimistic about the prospect of interest rate reductions this year.

Mortgage rates have surged and hundreds of the most competitive lending products have been withdrawn from the market over recent weeks. Last month witnessed the largest single-day removal of mortgage deals since the disastrous mini-Budget episode in 2022 under former Prime Minister Liz Truss. Halifax noted, however, that the recent escalation in mortgage rates has been less severe than the spike observed four years ago.

Amanda Bryden, head of mortgages at Halifax, stated that the recent slowdown in the housing market reflects widespread uncertainty regarding the Middle East conflict. Concerns about elevated energy prices have pushed inflation expectations higher, which in turn has led to rising mortgage rates, reducing confidence that interest rates will be cut this year and dampening the initial momentum observed at the start of the year.

Oil prices have soared in the weeks following the commencement of the US-Israel conflict with Iran. On Wednesday, Brent crude prices fell by 15% to $94 per barrel following announcements of a conditional ceasefire between Washington and Tehran. Nevertheless, oil remains approximately 30% more expensive than before the conflict began on 28 February, and there has been no immediate improvement in UK mortgage rates as a direct consequence of the ceasefire.

Interest rates on new fixed-rate mortgages were anticipated to decline before the conflict erupted. Instead, they have risen sharply. The average rate on a two-year fixed deal stood at 4.83% at the beginning of March but has since climbed to 5.90%, the highest level since July 2024, according to financial information service Moneyfacts.

Commenting on the duration of weakened demand, Bryden indicated it would largely depend on how persistent these pressures prove to be and the broader implications for the economy and unemployment. Mortgage lenders remain cautious, particularly as the geopolitical situation remains volatile.

Adam French, head of consumer finance at Moneyfacts, suggested that the longer the ceasefire holds and markets stabilise, the more the mortgage market will normalise, with rates potentially beginning to edge lower. For now, however, it is more likely to slow or pause increases rather than trigger any sharp declines.

Nicky Stevenson, managing director of Fine and Country estate agents, observed that house prices are likely to be volatile from month to month, but the broader picture remains one of modest stability.

The UK inflation rate, which measures the pace of price rises, registered 3% in the year to February as cheaper motor fuel offset increased costs for clothing and footwear. The Bank of England, which maintains a 2% inflation target, had previously indicated potential interest rate cuts this year. Such reductions would benefit borrowers, as Bank of England rates influence the mortgage rates set by financial institutions.

Since March, however, prices for petrol and diesel have jumped significantly to the highest levels since late 2022, according to the RAC motoring organisation. When inflation is elevated, the Bank can raise interest rates to bring it down. Higher borrowing costs reduce the amount of money people and businesses have available to spend and may encourage increased saving. This reduces demand for goods and slows price rises, although it represents a delicate balancing act, as increasing borrowing costs risks harming economic growth.

Rachel Winter, a partner at wealth management company Killik & Co, told the BBC’s Today programme that the outlook for inflation is possibly not as severe as it appeared on Tuesday, owing to increased optimism about a diplomatic resolution. She indicated, however, that interest rates are unlikely to decline this year.