The Office for Budget Responsibility (OBR) has published its latest economic forecast alongside the Budget, offering a less encouraging picture of the UK housing market. While the headline announcements have attracted attention, the report highlights continued pressure from higher mortgage costs, weaker housebuilding prospects and further tax increases for landlords.
Landlord tax rises could push rents higher
The OBR warned that the latest increase in property income tax will further reduce returns for private landlords. The additional two-percentage-point rise announced in the 2026 Budget will be added to the increase announced the previous year, with both measures due to take effect in April 2027.
According to the OBR, the changes follow a decade of measures that have already reduced the financial returns available to landlords.
The organisation warned that this could lead to fewer investors entering the rental market, reducing the supply of homes over time. If demand continues to exceed availability, rents are likely to rise.
Existing landlords may also decide to sell their properties, potentially giving those who remain greater scope to increase rents. The OBR cautioned that higher rental costs could offset some of the financial impact of previous measures on landlords.
House price growth remains subdued
House prices are forecast to rise by an average of 2% in 2026, followed by growth of 2.5% in 2027.
The OBR expects growth to remain below consumer price inflation, continuing a recent trend attributed largely to higher mortgage rates and stagnant real incomes.
The government’s Your First Home scheme could also have a small effect on property prices. The OBR suggests that helping more first-time buyers enter the market may increase demand and marginally push prices upwards.
Fewer property transactions expected
The number of property transactions is forecast to reach 1.2 million in 2026, gradually increasing to around 1.3 million by 2031.
The OBR expects activity to recover as the housing market moves towards its assumed long-term turnover rate, with each home changing hands approximately once every 24 years. Growth in the overall housing stock is also expected to contribute to transaction volumes.
However, the forecast is around 4% lower across the period than the OBR’s estimate in March. Higher mortgage rates are expected to discourage some buyers, limiting activity in the market.
Mortgage rates could climb to 5%
Borrowers face further pressure from the OBR’s mortgage rate forecast. The average effective mortgage rate, currently around 4%, is expected to increase to 5% by 2031.
One contributing factor is the number of homeowners expected to move off fixed-rate deals secured when borrowing costs were considerably lower.
The OBR also highlighted the scale of household mortgage debt. Outstanding mortgage borrowing is projected to remain at around 85% of disposable household income throughout the forecast period. Although this is below the peak reached during the financial crisis, it remains higher than at any point before the early 2000s.
Mortgage payments are expected to account for 4.25% of disposable household income by 2031. This would be the highest proportion since 2009 and more than double the 2% recorded in 2021.
Housing supply target faces further challenges
The OBR’s report also raises concerns about the government’s ambition to deliver 1.5 million new homes by the middle of 2029.
It attributes part of the weaker outlook for housing supply to the cumulative impact of regulatory and tax changes introduced over the past decade, particularly since 2019.
Measures affecting development include the Building Safety Levy, the Building Safety Regulator regime, Biodiversity Net Gain requirements and nutrient mitigation schemes. The OBR also points to the residential property developer tax and higher corporation tax rates.
According to the organisation, these changes have increased the cost, complexity and time required to build homes. Their combined impact appears to have restricted housebuilding activity more than previously anticipated.
A difficult outlook for buyers and landlords
The OBR’s latest projections suggest the housing market will continue to face several challenges, from rising borrowing costs and subdued house price growth to a weaker outlook for new housing supply.
Landlords may face further pressure on returns as property income tax increases take effect, while tenants could experience higher rents if fewer investors enter or remain in the market.
For buyers, higher mortgage rates could continue to limit affordability and discourage transactions. Meanwhile, rising development costs and regulatory requirements present additional obstacles to increasing the supply of homes.
Taken together, the forecasts point to a challenging period for the UK property market, with affordability and housing availability likely to remain key concerns.
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