London house prices fell 4.6% from peak to trough between mid-2022 and late 2023. That correction is now over. Average prices rose 2.1% year-on-year by Q4 2024, and most forecasters expect 3-5% annual growth through 2026. The market isn't booming. It's stabilising, and for investors, that's often the best time to buy.
Interest Rates: The Dominant Variable
The Bank of England's base rate peaked at 5.25% in August 2023. By early 2025, it's been cut to 4.5%, with markets pricing in two more 25bps cuts by year-end. Mortgage rates have responded. The average 5-year fixed for a 75% LTV buy-to-let sits around 5.0-5.5%, down from a peak of 6.5% in late 2023.
Every 100bps reduction in mortgage rates adds roughly 10% to buyer purchasing power. If base rate reaches 3.75% by mid-2026 (the consensus forecast), buy-to-let mortgage rates could settle around 4.0-4.5%. That's the level where London's rental yields start covering mortgage costs again, a threshold that's been broken for the past two years.
But don't expect a return to 2% rates. The era of ultra-cheap money is over. The new normal is 3.5-4.5% base rates, and London investments need to work at those levels.
Supply Constraints Aren't Going Away
London needs approximately 66,000 new homes per year. It's building about 35,000. That 31,000-unit annual shortfall has persisted for over a decade. Planning permission backlogs, labour costs (up 8% since 2022), and elevated materials prices mean new-build output isn't scaling.
The result is a structurally undersupplied market. Listings on the major portals are 25% below pre-pandemic levels. In Zone 2-3, the sweet spot for yield-focused investors, available rental stock dropped by a third between 2019 and 2024. Fewer properties available means higher rents and stronger occupancy.
Rental Growth: 5-8% Annually in the Right Areas
London rents grew 7.4% year-on-year in 2024, according to the ONS. That's the third consecutive year of above-5% rental growth. The drivers are structural: population growth (London added 300,000 residents in 2023), declining home ownership rates among under-40s, and constrained supply.
Zone 1 (Mayfair, Kensington, Westminster) saw 4-6% rental growth, strong but moderated by the premium price base. Zone 2-3 (Hackney, Lewisham, Brixton, Stratford) outperformed at 6-8%, driven by young professionals priced out of Zone 1. Zone 4-5 (Croydon, Barking, Walthamstow) hit 7-9%, benefiting from transport improvements and corporate relocations.
We expect rental growth to moderate to 4-6% annually in 2025-2026 as rate cuts improve buyer affordability and some renters transition to ownership. But the baseline trend is clear: London rents are going up, and they're going up faster than inflation.
Post-Election Stability
The Labour government's July 2024 election victory removed a significant overhang. Markets had priced in policy uncertainty around rent controls, landlord licensing, and capital gains reform. What actually emerged was more moderate: extended notice periods for tenants, a ban on Section 21 "no-fault" evictions (already expected), and no rent caps.
The Renters' Reform Bill adds administrative cost for landlords but doesn't fundamentally change the economics. Investors who manage properties professionally, with proper contracts, responsive maintenance, and fair pricing, aren't materially affected. The amateur landlords who rely on legal loopholes are the ones feeling the squeeze.
Capital gains tax on property disposals remains at 18% (basic rate) and 24% (higher rate). The October 2024 Budget didn't change this. For international investors, the UK's tax treaties and reporting obligations are the more relevant factor, and they vary significantly by nationality.
Best Areas for 2025-2026 Growth
East London (Stratford, Leyton, Walthamstow): The Elizabeth Line effect is still playing out. Average prices in E15 rose 8% in 2024. Stratford's regeneration around the Olympic Park continues with the East Bank cultural quarter. Entry prices: £350-500/sqft for a two-bed flat.
South London (Lewisham, Catford, Forest Hill): The Bakerloo Line extension (if approved) would transform Lewisham's connectivity. Even without it, prices in SE13 are 30-40% below neighbouring Greenwich. Average two-bed flat: £380,000-450,000.
Croydon: London's largest suburban centre with active regeneration. Rents have grown 9% annually since 2022. Average prices are £300-380/sqft, roughly half of Zone 1. Gross yields of 5-6% are achievable.
Nine Elms / Battersea: The Northern Line extension is complete. Prices haven't fully recovered from over-supply of new-build stock, creating value opportunities. Two-bed apartments from £550,000 with yields around 4.5%.
The Investment Case
London isn't a yield market. At 3-5% gross, it doesn't compete with Dubai or emerging markets on income alone. The case for London is capital preservation plus moderate growth in one of the world's most liquid property markets. Sterling-denominated property has historically been a safe-haven asset. The legal system protects ownership rights. The rental market is deep and regulated.
For investors who can access mortgage finance and are targeting 5+ year holds, Zone 2-3 London property offers a defensible combination of 4-5% gross yield, 3-5% annual capital growth, and currency diversification. It won't make you rich quickly. It will hold value and compound steadily.