According to an economist, London's home prices will surpass those of the rest of the United Kingdom

Capital Economics predicts that London's home prices will rise more quickly than the rest of the nation after years of underwhelming performance

We examine why this forecast was made and whether other experts concur.

According to an economics consultancy, London house prices are expected to increase by 62.5 percent next year, which is more than the 5 percent increase predicted for the national average.

The punchy prediction follows years of underperformance for house prices in the capital. Nationwide's Q2 index indicates that London house prices increased by just 1 point 4 percent over the previous 12 months, resulting in an average price of 532,449.

In contrast, the average home in the UK now costs 272,751, a 2.9 percent increase in price. Northern Ireland (up 97 percent) and the North (up 55 percent) were the two regions with the best results.

Nevertheless, Capital Economics thinks that following nine years of poor performance, there is potential for London home prices to surpass those of the rest of the nation in the coming years due to a combination of reduced mortgage rates and a very small amount of supply in the pipeline.

The consultancy's UK economist, Ashley Webb, remarks: "London house prices stand to gain the most from our prediction that quoted mortgage rates will drop from 4.2 percent in July to about 3.7 percent by 2026, as affordability is most stretched in London.

House prices in the capital do, in fact, typically suffer far more than those in other areas when interest rates rise. However, London real estate prices usually recover more quickly when interest rates decline.

According to Webb, the relaxation of long-standing restrictions and the loosening of mortgage lending criteria should also boost property prices in London locations. This is because lenders are now able to issue over 15% of new mortgages with a loan-to-income ratio higher than 4.5.

"More homebuyers can now take out loans than they could previously. These policies will have the biggest impact on housing prices in the most expensive area of the UK, as London's average house price-to-earnings ratio is 1.5 times higher than the national average.

Webb cites a third factor contributing to rising real estate prices in London: a lack of new construction.

Even though data indicates that an excess of supply is the cause of a faltering real estate market that may "temper house price growth in the capital in the near term," according to Capital Economics, "housing starts in London as a share of existing dwellings had fallen by a further 68 percent by Q1 2025 while the rest of the UK recorded an 80 percent rebound."

Webb goes on to say: "It's true that London has a lower percentage of new homes that are converted from existing residential and commercial buildings than other UK regions because there is less space there to build new homes.

However, London's current conversion rate is insufficient to make up for the extremely low number of new homes being built.

All of this suggests that home values in the capital may rise more quickly than the national average, but Webb questions whether "the London price premium will return to its pre-pandemic level" and notes that certain parts of the city will fare better than others.

Do other experts agree with this forecast?

Capital Economics has made the audacious prediction that London house prices will rise by 6 points, or 5%, compared to 5% for the UK as a whole.

Knight Frank, an estate firm, disagrees, predicting that house prices in the UK will rise by 4% and Greater London by 3% in the upcoming year. The percentage falls to 2 percent when drilling down to prime central London.

Knight Frank continues to believe that the capital will fall short of the national average in 2027, 2028, and 2029.

The head of Knight Frank's UK residential research, Tom Bill, tells BFIA: "We anticipate that, in line with previous years, London home prices will continue to underperform the rest of the UK into next year.

Due to affordability restrictions, home prices have generally increased more in more affordable areas of the nation, and nowhere is the squeeze more severe than in the capital. Over the next few years, the difference in home prices between London and the rest of the UK will close, but not enough to spark demand in the capital again.

He continues by saying that while sectors of the UK economy like technology, biosciences, and retail warehousing are predicted to grow in the upcoming years, they are typically found outside of the capital and won't raise the value of homes in London.

North London real estate agent and former residential chairman of the Royal Institute of Chartered Surveyors (RICS), Jeremy Leaf, claims that any increase in London real estate prices above the rest of the UK is probably "generated by more settled economic conditions and improvements in affordability and buying power."

He notes that "it is hard to see that changing anytime soon" and that London's strong job prospects continue to make it appealing to prospective buyers despite rising real estate costs.

Leaf emphasizes that the capital is highly variable and that any increases in home prices will rely on the specific location and kind of property.

The market in the center is probably going to continue to be harmed by the changes to non-dom status, so we would anticipate higher price increases in the more popular parts of London, especially the suburbs.

According to the type of property, values also vary. On the ground, we are observing that buyers with needs are searching for longer-term single-family homes rather than activity in the flat market, which is currently beset by an excess of supply.

Why have London house prices underperformed in the past?

Capital Economics claims that London experienced a period of outperformance from 2010 to 2016, but since then, the capital's home prices have lagged behind the UK average.

This can be attributed to a number of factors, including higher mortgage rates, reduced employment growth in London following the Brexit referendum, and higher taxes for buy-to-let landlords, which have prompted some to sell.

Following the pandemic, the ability to work remotely allowed households to relocate to less expensive areas with larger homes and more outdoor space, which also helped to keep London real estate prices under control.

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