The Middle East conflict will affect the UK housing market in multiple ways but there are four identifiable stages. The overall impact will depend on how long each phase lasts.
Below we look at how it has already influenced the Country market, an area that covers a range of £750,000-plus rural and urban locations outside London.
STAGE ONE: THE HEADLINE SHOCK
Sentiment was first dented when the conflict began on 28 February. However, as with previous wars, the escalation risk is key and provided there are no signs of intensification, the conflict becomes priced in – by buyers, sellers and financial markets.
The Country market was recovering from November’s Budget in the early months of this year. Combined with the seasonal pick-up in demand that typically happens in March, there was no obvious drop off last month.
The number of offers made was 13% below the same month in 2024, but that compares to a 20% decline in February versus two years ago. Last April’s stamp duty changes skew year-on-year comparisons.
Supply was more obviously affected than demand in March, with the number of new sales instructions falling by 17% versus the same month in 2024. In February, there was a smaller 12% drop.
The evidence at a national level is also inconclusive. While Halifax reported that UK house price growth fell to 0.8% from 1.2% in February, Nationwide said the figure increased to 2.1% from 0.9%.
The resilience of demand compared to supply last month is partly explained by the fact a number of buyers were sitting on sub-4% mortgage offers that pre-dated the conflict.
Transactions were unaffected, with deals still going ahead despite the geopolitical uncertainty. The number of exchanges in the Country in March was 3% higher than the same month in 2024.
STAGE TWO: THE MORTGAGE SPIKE
This stage may also be approaching its conclusion but that depends both on whether the conflict escalates and how long it lasts.
While negotiating a ceasefire will not be a linear process, both sides appear to be moving towards a deal. That sense of momentum was underlined earlier this week when the main S&P500 US stock market index climbed above its pre-war level.
“For stocks, which are inherently forward looking, the ‘light at the end of the tunnel’ allows markets to somewhat shrug off day-to-day headlines regarding the ongoing conflict and instead focus on the broader direction of travel,” said Michael Brown, an analyst at financial broker Pepperstone.
“While the journey to get there is indeed likely to be a bumpy one, the most important point for participants will be ensuring that we remain on that journey.”
Although the conflict appears to be de-escalating, the upwards pressure on mortgage rates remains as inflation is expected to stay higher for longer.
The five-year swap rate, which lenders use to price fixed-rate mortgages of the same length, was 4.1% at the start of this week, having been less than 3.5% in February. However, the rate has come down from 4.3% four weeks ago, which underlines the positive direction of travel.
Financial markets were fully pricing in one rate hike in 2026 at the start of this week, which compares to an expectation of two cuts in mid-February. However, if the conflict ends within weeks and the UK jobs market remains fragile, cuts may come back onto the table for the Bank of England.
We expect the impact of higher rates to filter through to the housing market over coming months, putting downwards pressure on prices to a greater extent than transaction volumes.
STAGE THREE: THE GRADUAL RECOVERY
While there are positive signs for borrowing costs and sentiment, we won’t be in full recovery mode until hostilities end.
Not that it will not be a quick process, for reasons I discussed on the latest episode of Housing Unpacked with the CEO of Blonde Money Helen Thomas.
The time it will take for commodity backlogs to clear and transport networks to normalise means upwards pressure on inflation will persist for months.
The government’s tight financial headroom and falling demand for UK government debt are structural issues that will also keep upwards pressure on interest rates and downwards pressure on house prices, as discussed in more detail on the podcast.
Average prices in the Country fell 5.5% in the year to March 2026, which was a modest improvement on the 5.7% decline recorded in December. It means prices are now 13% lower than their pandemic-era peak in Q2 2022, a time when demand increased for more space and greenery.
“Possibly surprisingly, the geopolitical uncertainty hasn’t had too dramatic an impact on the market with many buyers and sellers getting on with their transactions, particularly those who are needs-driven,” said James Cleland, head of Country sales at Knight Frank.
“There’s no doubt that a sensible asking price continues to be crucial and my sense is this will remain the case for the rest of the year as the impact of the US-Iran conflict plays out, with the trajectory of mortgage rates particularly important.”
The annual price decline for flats (-3.8) and town houses (-5.1%) was lower than for farmhouses (-7.1%), underlining how demand has been stronger in needs-driven markets.
STAGE FOUR: THE POLICY RESPONSE
Another result of the conflict is likely to be months of tax speculation ahead of the autumn Budget.
A political narrative about global events forcing the government’s hand has already been seeded by the Chancellor.
One extra layer of uncertainty this year is the political survival of Keir Starmer and Rachel Reeves. The Middle East conflict has made it more likely but next month’s local election results will also be an important consideration.
However, even if they remain in post, the Labour Party will need to fend off an emerging challenge from the Green Party and move to the left politically.
With a Chancellor seemingly unable to get large-scale spending cuts past her backbenchers, we could see a repeat of the “smorgasbord” approach taken last year when she introduced multiple smaller tax rises.
Given the upwards pressure on the cost of UK government debt since then, the highwire balancing act required to keep the bond market happy will be even more precarious.
All of which means that even once images of the conflict have disappeared from our TV screens and sub-4% mortgage rates make a re-appearance, the ramifications of the war will be felt for much longer.
