British house prices are set to rise only modestly next year as buyers' budgets are squeezed by higher household bills, the nation's largest mortgage lender said today.
HBOS, which publishes the Halifax housing market survey, predicted prices would rise just 3 per cent in 2006 compared with the annual rate of 4.5 per cent it reported for November.
"Low, single digit, growth is expected to be the norm. UK house prices are forecast to rise by 3 per cent, broadly in line with the predicted rise in retail price inflation," HBOS said in a statement.
"A number of factors are expected to prevent a renewed surge in house prices and activity. Both council tax (a local authority property tax) and utility bills are expected to rise by well above inflation in 2006."
Still, demand would be underpinned by a relatively robust labour market and the prospect of more interest rate cuts.
The Bank of England cut interest rates to 4.5 per cent in August and a majority of economists expect policymakers will repeat that reduction in the new year to shore up slower economic growth.
A year ago, some economists were saying Britain could be headed for a sharp correction in house prices after an extended period of double-digit inflation and as the BoE hiked interest rates five times between November 2003 and August 2004.
But the market seems to have achieved a soft landing and BoE policymakers are counting on a gentle recovery to boost consumer spending which has slowed sharply over the last year.
HBOS said that this year house prices had risen by less than the long-term average of 8 per cent a year for the first time since 2000.
The lender's forecast on prices is broadly in line with predictions from other housing market analysts who also see only modest gains next year as some buyers are unable to afford new property, with house price rises having outstripped earnings growth.
But HBOS forecast that earnings growth in 2006 would be 4.5 per cent and would therefore outstrip house price growth, making it slightly easier for first-time buyers to get on the housing ladder.