Unemployment set to rise in 2026: Here’s the way it may hit home costs

Unemployment is on the rise, having gone up by nearly a quarter in just 14 months according to the latest figures from the Office of National Statistics.

The rate of joblessness rose from 4.1 per cent in August 2024 to 5.1 per cent in October 2025.

And fresh figures show Britain’s dominant services sector slashed jobs for the 15th month in a row in December, according to the closely-watched purchasing managers’ index (PMI) survey.

Things are only expected to get worse this year, according to a recent survey of economists by the Times. 

Of the 48 economists it surveyed, two thirds forecast that unemployment will end this year at between 5 per cent and 5.5 per cent while 15 per cent predict it will reach between 5.5 and 6 per cent.

With more people out of work, this could have repercussions for the housing market.

‘Property price inflation fell at the end of 2025 as many prospective buyers pressed pause in the run up to the Budget,’ says Peter Stimson, director of mortgages at lender MPowered Mortgages.

‘Demand has since recovered and this is likely to nudge prices upward, but a jump in unemployment in coming months could see property price rises slow back down.’

Why is unemployment rising?

Some of the Government’s policies have made it more expensive for businesses to employ people. 

This includes its decisions to raise the minimum wage, and the National Insurance contributions paid by employers. 

There are also potential costs that will feed through from the Government’s Employment Rights Bill which was passed in December. 

‘This is the sharpest rise in joblessness in several years and takes us back to levels last seen during the recovery from the pandemic,’ says Mark Cunningham, a partner at audit, tax and business advisory firm, Blick Rothenberg.

‘Businesses have been hit hard by Labour’s increase to employers National Insurance contributions and national minimum wage. 

‘The wage increase has been counterproductive for young workers; almost 40 per cent of 18–24-year-olds are now currently out of work.’

Growing use of artificial intelligence has also led to hesitancy in hiring.

Last month, the governor of the Bank of England warned that Britain needs to be prepared to see people lose jobs due to the rise of AI.

In an interview with BBC Radio Four’s today programme, Andrew Bailey said that widespread adoption could have a similar impact on the jobs market as the industrial revolution. 

What does it mean for the property market?

House prices are impacted by all manner of things, including interest rates, property taxes such as stamp duty, government incentives such as Help to Buy, and local factors such as regeneration and supply and demand imbalances. 

However, a surge in unemployment can arguably cause the most damage to the value of people’s homes.

During the 2008 financial crisis unemployment rose from 5.1 per cent to 7.9 per cent in the space of 16 months between January 2008 and May 2009.

During that same period, average UK house prices fell by around 15 per cent from £171,000 to £145,000.

‘Labour-market shocks can be particularly damaging to housing because job losses reduce buyer demand and increase forced sales at the same time,’ says Paula Higgins, founder and director of property advice website, HomeOwners Alliance.

‘This is a far more destabilising combination than interest-rate rises alone, which mainly affect affordability and are often cushioned by fixed-rate mortgages. 

‘If unemployment continues to trend higher, it would increasingly undermine confidence and households’ ability to buy due to weaker job security.’

Could this be a repeat of the financial crisis?  

The forecasts for unemployment remain modest by historical standards, which means we are likely some way off a repeat of 2008.

‘Rising unemployment does affect confidence and can make households more cautious about moving, but the current situation still looks very different from past periods when house prices fell sharply,’ adds Higgins.

‘Most major UK house price indices are forecasting modest growth this year, supported by improving affordability as earnings growth continues to outpace house price growth and edge down. 

‘There is also evidence that some buyers paused decisions during the prolonged period of Budget speculation and are now returning to the market, with the tax changes announced unlikely to have a material impact on the majority of transactions.’

Any surge in unemployment is likely to be met with additional interest rate cuts by the Bank of England, which could ease pressure on households.  

MPowered’s Stimson says: ‘If unemployment spikes very high, the Bank of England would likely step in to support the economy, typically by reducing its base rate. 

‘This would bring down mortgage interest rates, making mortgages cheaper for those who can borrow – though doing little to help the unemployed get on the property ladder.’

Why house prices fall when unemployment rises

Having a regular income – which for most people means a job – is a prerequisite for getting a mortgage. 

That’s why mortgage lenders ask to see a person’s most recent payslips, or tax return, before agreeing to lend to them. 

Stimson says that rising unemployment simply results in fewer mortgages being handed out and therefore fewer buyers.

‘A rapid rise in the number of unemployed Britons would mean more people won’t be able to secure a mortgage,’ he says. ‘This would cool the demand for homes, and thus hold back property price rises.

However, the problem won’t necessarily be people being turned down for a mortgage, but rather not applying in the first place.

Stimson adds: ‘The fear of losing their job alone can put aspiring buyers off the idea of buying, so the chilling effect that rapidly rising unemployment has on demand could be significant.’

The first-time buyer end of the market could be the area where demand retreats the most, according to Stimson.

‘There are signs that AI is reducing the number of graduate jobs available, and young professionals have traditionally formed a sizable proportion of Britain’s first-time buyers,’ he says.

‘If this trend continues, we could see demand for first homes – which are often seen as the key to the housing market – slide.’