House prices set for 'soft landing'

House prices will rise just 2 per cent in real terms next year, the Nationwide building society said yesterday despite reporting an unexpected surge in prices last month.

House prices will rise just 2 per cent in real terms next year, the Nationwide building society said yesterday despite reporting an unexpected surge in prices last month.

A sharp slowdown from the 15 per cent seen in 2004 would be seen across the country with prices in Northern Ireland alone growing more than 3 per cent.

Alex Bannister, Nationwide's group economist, said the market would be slowed by higher interest rates and inflation, subdued take-home pay growth, higher debt levels and rising energy prices. "They are likely to lead to a gentle braking of house price growth as opposed to a full-scale emergency stop," he said. "So far, the changing economic backdrop is acting as a drag on the housing market in contrast with the early 1990s when the severe economic downturn resulted in a sharp correction."

This time last year the Nationwide predicted growth of 9 per cent but underestimated the appetite of buyers to take on debt. But Mr Bannister said any risk to its forecast was one of steeper falls, of up to 15 per cent.

Nationwide's confidence was supported by its own figures, showing that the price of a home typically rose by 1 per cent last month. The rise defied forecasts of a fall and followed the 0.4 and 0.2 per cent drops in the preceding two months.

"This indicates that rather than crashing, the UK housing market is looking forward to a soft landing," said Andrij Halushka at the Centre for Economics and Business Research.

The strength of the number, combined with a rebound in a key high-street survey, pushed the pound above $1.91 for the first time since February. The CBI said retail sales grew at their fastest pace in four months in November as retailers continued to cut prices to attract buyers.