The recovery will be fuelled by a long-term reduction in the cost of mortgage repayments, allowing home buyers to borrow higher multiples relative to their earnings.
London and the South-east will see even higher rises, reaching up to 15 per cent before tailing off in 1998. By contrast, Scotland, Wales and the North of England will average between 6 and 8 per cent next year.
The report by Rob Thomas, a leading housing expert at UBS, the Swiss banking group, warns that prices could rise even further: "With housing seriously undervalued by any historical comparison, the market's new-found confidence will fuel a rapid `catching-up' period.
"There is a danger that this catching-up period will rekindle speculative buying and push house prices above their multiple long-term earnings. This would involve much higher price rises than in our forecast."
The number of house sales will also reach 1.7 million a year by 2000, a rise of 50 per cent compared with the total of 1.1 million in 1995.
Mr Thomas's bullish estimates come in the wake of a sustained housing market, which has pushed the average increase in prices over the past 12 months to more than 7 per cent. They are also ahead of nearly all other predictions for property inflation next year.
Earlier this year, Legal & General, the insurance company, issued a report arguing that prices would rise by 42 per cent in the next five years. But it claims that the rise would be more pronounced in later years than in 1997 and 1998. The Halifax expects prices to go up a further 7 per cent next year.
Last year, many experts had predicted rises of no more than 3 to 5 per cent for 1996, arguing that the watchword for the 1990s was of home buying for "nesting not investing".
The lessons of the housing crash in the past five or six years meant few people would be prepared to consider property as a speculative investment, while today's low inflation climate dampens demand for housing.
But Mr Thomas's report argues: "Houses are costly and volatile assets. Few buyers can afford to ignore the investment element and just treat them like any other consumer durable.
"The main difference between the speculative days of the 1980s and today is that those who bought in [that period] found that like all other investments, [housing's] value can go down as well as up."
It adds that the October 1987 stock market crash, painful as it was, has not prevented investors from returning to the market.
The report points out, however, that housing operates in a cyclical market and that after several years of growth - giving cumulative growth of 46 per cent up to 2001 - prices will dip slightly.
The housing market has embraced a boom bust mentality since the end of the war. From 1948 to 1957, house prices fell 30 per cent, when inflation was running at 3.9 per cent. However, for the 16 years to 1973, prices rocketed 167 per cent, or 6.3 per cent a year - well ahead of annual inflation of 4.3 per cent. The subsequent crash saw prices fall 33 per cent in four years - when inflation averaged 18.9 per cent. And in 1982 to 1989, prices rose 85 per cent, with inflation a more containable 5 per cent.
Mr Thomas said on Friday that his report assumes inflation of between 3 and 4 per cent each year for the next five years. The net effect will be that, relative to prices at the time, the real value of a home will have risen by about 23 per cent.
He added: "House price inflation in the past few years has been so well below historical levels that an element of catching up to more normal levels can be expected."
Mr Thomas disputed suggestions that the recent increase in prices was caused by high demand and insufficient properties on the market.
"Many of those selling houses will also be people hoping to move into new ones. It suggests turnover will continue to rise over the next few years."Reuse content