House prices head for standstill

THE rise in house prices will slow drastically and grind to a halt as early as next year, says the Bank of England. It warned that the annual rate of increase - currently 23% - could dwindle to zero much earlier than expected.

Low interest rates, low unemployment and high demand have fuelled massive rises in the property market over the past three years, pushing the price of the average house to £150,000. These factors are still in place but experts say prices have now outpaced growth in earnings - particularly for first-time buyers.

The authors of the Bank's quarterly inflation report said they assumed house price inflation will 'slow to a halt over the next year or so, earlier than had been assumed'. They also warned debt-to-income ratios had reached record highs, leaving many households vulnerable if interest rates rise or incomes fall.

The report raised fears that the market will collapse if the economy suffers further setbacks.

Experts say prices are already falling in London and the South-East and that this could spread to the rest of the country.

Andrew Oswald of Warwick University has warned of a possible 30% fall by 2005, which would leave almost 500,000 families trapped in negative equity. Lenders reacted by saying they believed the market would remain relatively strong with mortgages remaining affordable.

They expect rises of 9% or 10% this year and say the rises will simply slow further next year, rather than come to a complete halt.

Halifax chief economist Martin Ellis said: 'We agree the market is slowing and will continue to do so. We feel the rate of rises will fall to four% next year. This is not quite as abrupt as the Bank predicts.'

The Bank of England is the latest organisation to disagree with Chancellor Gordon Brown's bullish predictions for the economy. Although it has raised its central growth forecast for next year to 2.5%, this is still below the 3 to 3.5% projection made by the Chancellor in the Budget.

Slower growth will affect Mr Brown's tax revenues and therefore his ability to fund spending plans for schools and hospitals. This will put pressure on him to either raise taxes or borrow to meet his spending pledges.

Matthew Taylor, the Liberal Democrats' Treasury spokesman, said: 'The Bank of England has rejected Gordon Brown's optimistic growth projections and has refused to back them. It is time to call in the auditors so that we have a believable forecast not wishful thinking.'

The Bank said uncertainty about global recovery, prospects for exports and the extent of the slowdown in consumer spending and house prices could all hit growth.

Household spending has slowed to its lowest rate in four years, the report said, adding that spending was expected to decline but that this was faster than predicted.

The Bank's deputy governor Mervyn King said consumer spending would affect the outlook due to the fall in the exchange rate and the impact of higher National Insurance contributions and council tax.

Analysts said the Bank was likely to keep interest rates on hold at 3.75% for the next few months.

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