2025 has been a year of shifting expectations rather than rapid progress. It has not been a strong year, but it perhaps hasn’t been as difficult as some feared at the start. Inflation is easing, and interest rates have begun to fall, which has helped to create a calmer environment. For property investors, this means the outlook for 2026 is more stable, with clearer signs on pricing, demand, and the wider economic setting.
Whilst the market hardly welcomed the tax increase on property income and the introduction of a ‘Mansion Tax’ within the long-awaited Budget, the sentiment was that it could have been worse and at least there should be an end to speculation about policy.
The Budget did actually offer some helpful signals. Forecast growth for 2025 has been revised up to 1.5%, and the Office for Budget Responsibility (OBR) expects growth of a similar level over the next few years. This is not fast expansion, but it does show that forecasts have firmed, which brings more certainty for those making long-term plans. Inflation, which has reduced real returns and pushed up costs, is expected to fall to around 2% by early 2027. If this holds, it should support both investor confidence and household finances.
Interest rates are also starting to move in a better direction. The Bank of England has now reduced base rate five times during this Parliament. According to the OBR, the rate is expected to fall to a low point of 3.6% at the end of 2026 before rising slightly in later years. While this is still higher than the levels seen for much of the last decade, it is a clear improvement on the sharp increases seen in 2022 and 2023. Lower borrowing costs will help investors manage cash flow and assess new opportunities with more clarity.
The OBR also gave a view on activity levels in the housing market. It expects property transactions to rise from just under 1.1 million in 2024 to around 1.3 million in 2029. This suggests a slow but steady increase, supported by a more stable interest rate outlook and a slight pick-up in demand. This will not remove all the pressure on the market, but it does indicate that the long period of subdued activity may now be easing.
Alongside the OBR forecast, Savills expects 2% house price growth in the mainstream market next year, followed by a cumulative rise of more than 22% between now and 2030. These figures are modest by historic standards, but after months of news focused on falling values, they show a shift in tone. Stable growth is often seen as more sustainable and less disruptive than rapid increases, and this may suit investors who prefer long-term planning and steady returns.
It’s always important to look at the detail beyond the headlines, especially in the buy-to-let market. Even with inflation easing and rates falling, investors continue to face higher running costs and tougher regulation. Despite these challenges, the sector has performed better than many expected. Data from UK Finance shows that the average gross buy-to-let rental yield rose to 7.26% in the second quarter of 2025, up from 6.9% a year earlier. At the same time, the average interest rate on new buy-to-let loans fell to 5%, almost 20 basis points lower than the same quarter in 2024. This combination of higher yields and slightly lower borrowing costs has helped offset some of the pressure felt during the recent rise in interest rates.
This more stable outlook should provide a more stable base for landlords, but it’s unlikely to reverse the trend amongst investors to diversify their portfolios with different types of investment, such as HMOs, MUFBs and semi-commercial property, that can offer stronger income. And, with demand for housing continuing to exceed the supply of homes, the opportunities for refurbishment projects and conversions will continue.
So, we should look ahead to 2026 with quiet optimism. Inflation is easing, interest rates are lower, and house price forecasts show modest growth rather than decline. Rental yields remain firm and, in some area, are improving.
There will still be challenges. Higher costs, slower wage growth, and political uncertainty may all influence sentiment. But after months of speculation the direction of travel is now clearer. For investors who are prepared to take a measured approach, the year ahead offers more certainty, more predictability, and a more settled foundation on which to plan.
