House price growth will fall to zero in 2008, warns Nationwide

The growth in house prices is set to stall next year as the market witnesses a significant slowdown, the Nationwide said yesterday. Annual inflation in property prices will slump from its current 9.7 per cent to 0 per cent by November 2008, the building society warned.

It said the slowing economy, rising oil prices, tighter credit conditions, stretched affordability and falling demand for buy-to-let homes would all have an adverse impact on growth.

Nationwide expects wide regional variations in house price increases over the coming year. Scotland is predicted to do best, with prices going up 4 per cent. In Northern Ireland, which has seen year-on-year growth of 40 per cent or more, it believes prices will fall by 5 per cent.

Fionnuala Earley, the group's chief economist, said the momentum which had kept prices strong this year was now fading. "The strength of the economy was a key support to the housing market for most of 2007. Yet, as we move into 2008, economic tail winds are increasingly being replaced by head winds. We expect economic growth to fall below 2 per cent next year, from more than 3 per cent in 2007.

"A slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity."

Despite sounding a note of caution about buy-to-let investments, Ms Earley played down recent fears of a mass exodus from the market. She added: "The growth in buy-to-let appears to have been driven by a shift in preferences toward property as a retirement provision. This is consistent with surveys suggesting most landlords are long-term investors rather than speculators, and that they would not exit the market abruptly."

In London, she said, house prices were likely to remain flat because of uncertainty in the financial markets and its effect on bonuses and confidence in the City. The continuing lack of housing supply and the demand for prime property from overseas could give "some support" to price growth in the capital but was unlikely to prevent a major downturn, Ms Earley predicted.

The Nationwide forecast was supported by a survey of commercial property by the Royal Institution of Charted Surveyors, which was also published yesterday. The RICS noted that the continuing credit crisis had hit investment in the market during the third quarter of the year, with the office, industrial and retail sectors all suffering.

Simon Rubinson, the chief economist at the RICS, said: "The turmoil in the credit market is being most acutely felt in commercial property because the sector is more dependent on capital market funding than in the past."