Property prices set for modest rise next year, says Nationwide

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Commentators who forecast a crash in house prices should "eat humble pie", Nationwide building society said yesterday as it forecast another year of modest rises in house prices.

The UK's largest mutual lender said a resilient labour market would support the market in 2006, while high levels of house values and consumer debt would prevent a return to boom conditions. It said house prices would at worst stagnate and at best rise by 3 per cent over the course of next year, after gains of 2.4 per cent this year so far.

Last year, Nationwide predicted growth of between 0 and 5 per cent, and narrowed that down to a point forecast of 2.5 per cent halfway through the year. Fionnuala Earley, its chief economist, said forecasters had become better at "reading the runes" of the market after several years of super-inflationary boom.

Asked whether she believed the threat of a crash had vanished, she said: "I think I would be pretty confident to say that for 2006 although clearly, like oil prices, something else could come along and blindside us,the management of interest rates has been very good so the housing market has slowed down gradually. The doom mongers have been eating humble pie." She said even in a worst-case scenario prices would not fall more than 2 per cent and would be unlikely to rise more than 5 per cent.

Nationwide said high fuel prices, rises in interest rates and high levels of household debt have taken their toll on consumer spending. Meanwhile, high house prices put off first-time buyers, whose share of the total market fell from 30 per cent in 1999 to 12 per cent this year.

Ms Earley said the labour market had been resilient in the face of the economic slowdown with record employment and average earnings growth at a "respectable" 4 per cent. "The labour market is fundamental to the performance of the housing market and this is a major reason for its resilience this year," she said.

Against that background, recent surveys showed buyers no longer expected prices to fall significantly while sellers did not expect to soar away.