House prices 'set to rise by 8.5 per cent': Bank economist forecasts strong recovery in property market offering reassurance to owners struggling with negative equity

HOUSE PRICES will rise 8.5 per cent between now and the end of next year, David Kern, chief economist at NatWest bank, predicted yesterday.

The increase will be nearly twice the inflation rate expected over the period, though it will fall short of making up for the national average fall of 11 per cent in house prices since the slump began in the autumn of 1989. The improved market will bring further reassurance to homeowners struggling with negative equity that their houses could again be worth as much or more than their mortgages.

Mr Kern said he expected only a small movement in prices over the rest of this year, after a 3 per cent rise between the first and second quarters. But the recovery will gain momentum from the new year, he estimates, with a 7.5 per cent inflation in house prices during 1994.

The strongest boost between now and the end of next year will be in East Anglia, where prices will rise 10 per cent, though this compares with a 23 per cent average fall in the region since the third quarter of 1989. Other regions with above average gains will be Yorkshire and Humberside, the East Midlands, South-west and Wales. But the South-east as a whole will struggle to keep up, depressed by a lower than average rise of 6.9 per cent in Greater London by the end of next year. The rest of the South-east is likely to see an 8.3 per cent rise.

The forecasts, part of NatWest's analysis of Britain's regions, are based on a belief that East Anglia, the East Midlands and Wales, followed closely by the South-west and Yorkshire and Humberside, will register the strongest growth in their economies over the next few years. Greater London and the northern region are expected to grow at below average rates.

The economy of the rest of the South-east 'has improved in recent months, and next year as well as over the medium term will only marginally under-perform and perhaps match the national UK average', Mr Kern said.

He expects bank base rates to fall again to between 5 and 5.5 per cent by the end of this year, because otherwise the relatively firm pound could threaten competitiveness. But base rates would rise again to 7 per cent by the end of 1994.

Mr Kern's forecasts are in line with those produced last week by the securities firm UBS. Its analyst, John Wriglesworth, forecast no rise for the rest of this year and a 7 per cent increase in 1994. Mr Wriglesworth said the market was bumping along the bottom but should recover towards the end of the year and in 1994.

The number of people whose homes were repossessed in the first half of this year is expected to show a further fall when figures are released later this week. The numbers fell throughout last year and the total for January to June this year is expected to show another sharp drop.

(Table omitted)

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