Economic uncertainty could rise again as borrowers, brokers face more volatility
With the US-Iran war rumbling on, some forecasters are increasing the odds of a UK recession – and a deep hit to the British economy would mark another twist in what’s already been a wild year for the housing market.
Accountancy firm EY said on Monday that the UK economy would likely contract next year if the Strait of Hormuz, a crucial shipping route that remains blocked, does not reopen to shipping by mid-2027.
A protracted closure, EY’s UK chief economist Peter Arnold said, “would raise inflation and could push the economy into contraction next year.”
The outbreak of the conflict at the end of February sent oil prices soaring and heightened concerns that inflation could be about to spike. In the mortgage sector, lenders withdrew scores of products and hiked rates amid wider financial market jitters.
Some of that tension eased when US and Iranian negotiators struck a fragile ceasefire in April – but gilt yields surged again after hostilities resumed last month.
What a recession could mean for homebuyers
An economic contraction would likely threaten jobs and potentially push the unemployment rate higher, trends that might normally spur interest rate cuts by the Bank of England (BoE) and potentially bring mortgage rates lower.
But that picture is complicated significantly by the murky inflation outlook and the threat of a rising consumer price index (CPI). Expectations have hardened around possible rate hikes in the months ahead because of those inflation fears, even though the central bank opted to hold rates steady last week.
Mortgage pricing has already reflected the uncertainty that’s gripped financial markets, with some lenders raising rates even as others slashed rates on other products last week.
And brokers still see BoE rate increases on the horizon, possibly complicating the picture for their clients and presenting a fresh hurdle for hopes of improved affordability across the market.
But much will depend on events in the Middle East and whether the US and Iran can agree on a more lasting ceasefire. “If there’s a peace agreement announced in a week’s time and there’s a consensus growing that it will be a lasting peace, commodities can start flowing out of Hormuz,” Harry Arnold, director at Anderson Harris, told Mortgage Introducer.
For now, he’s more optimistic than others about the rate outlook. “I’m not convinced we’re going to get multiple interest rate hikes over the next few months,” he said. “Maybe one or two.”
Against that backdrop, the UK housing market has failed to find its feet in 2026 – and talk of a recession is unlikely to convince many sidelined potential buyers that now is the right time to move.
Never mind hikes – is there any chance of a rate cut?
Robert Gardner, Nationwide’s chief economist, said market activity and house prices “have remained soft in recent months, in part reflecting the uncertain economic backdrop,” and referenced high geopolitical tensions as a key cause of that strain.
Still, a silver lining for mortgage industry members and their clients: EY said it expects no change to the Bank of England’s key rate this year, and is even forecasting rate cuts next April and July.
For potential homebuyers with job security who are poised to step up their purchasing mission in the next year, that could be good news.
But for those sitting on the fence, or whose job prospects might be imperilled by an economic contraction, an uncertain and volatile environment doesn’t look like improving anytime soon.
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