Halifax backs predictions of drop in house prices

Soaring house price inflation is set to slow dramatically next year, mortgage bank Halifax predicted today.

Halifax, part of banking group HBOS, estimates the annual rate of house price inflation will increase by just 9% in 2003 - compared to highs of more than 30% reached in October this year.

Much of the slowdown is being blamed on the tough conditions now facing many first-time buyers. The surging cost of houses has been good news for existing homeowners but those who are yet to do so have found it increasingly hard to get on the property ladder.

Higher interest rates are also likely to play a part in the slowdown, with Halifax predicting the cost of borrowing will rise from current levels of 4% to 4.5% by the end of 2003.

However, Halifax was quick to point out that a property crash, such as that seen in the early 1990s, was unlikely.

Chief economist Martin Ellis said: "The continuation of low interest rates, low unemployment and the low proportion of earnings taken up by mortgage payments for a new borrower will provide a solid foundation for housing demand.

"As a result, we expect there to be a gradual slowdown in house price inflation rather than anything more dramatic."

The annual rate of house price inflation has almost doubled over the past year, rising from 15.5% in December 2001 to a peak of 30.6% in October before easing slightly to 29.2% last month.

Halifax is still predicting double-digit house price gains for most of the UK in 2003, but believes the discrepancy between the north and south will narrow. There is currently an 83% differential between London prices and the national average. Halifax believes this will fall to about 60% in the final quarter of 2003.

Four regions are expected to show only single-digit growth - East Anglia, the south-west, the south-east and London - while the biggest rises are forecast for the north (13%-16%) and Scotland (12%).

In London, inflation is predicted to be a modest 2% as the level of property prices in relation to earnings limits demand.

Job losses in the City, reduced bonuses and falling equities will all contribute, and the capital is forecast to have the slowest growth in the UK.

Nevertheless, Halifax remained confident that the housing market would remain buoyant overall throughout 2003.

Mr Ellis said: "Further house prices rises will support an increase in mortgage lending in 2003. High levels of remortgaging and further advances will also buoy activity, with the gross lending forecast to increase from an estimated ?218bn this year to ?235bn in 2003."


The predictions, part of HBOS's wider economic forecast for 2003, come a day after Capital Economics said house prices were set to fall by up to 30% over the next four years, suggesting property was currently so overvalued that a steep drop in prices was "on the cards" to bring the cost back down to affordable levels.

It expects house prices to continue to soar by double figures during 2003, before prices drop by 5% in 2004, 10% in 2005 and 7% in 2006.