The housing market is expected to be flat in 2006 with modest nominal house price growth and no change in real terms, said HBOS, the group that publishes the Halifax housing market survey.

The mortgage lender forecast UK house prices will rise by 3%, broadly in line with the predicted rise in retail price inflation. House prices have risen by less than the long-term average (8% per annum) in 2005 for the first time since 2000. Growth is expected to remain below the long-term average for the second successive year in 2006.

House price inflation is likely to rise further in early 2006 before easing later in the year. The annual rate of house price inflation is expected to increase during the first half of 2006, potentially reaching a peak of 7 - 8% mid year as modest price rises compare with slight falls in early 2005. The annual rate is subsequently expected to fall as prices rise at a significantly slower pace than in the second half of 2005.

A number of factors should prevent a renewed surge in house prices. Both council tax and utility bills are expected to rise by well above inflation in 2006 causing non-mortgage related housing costs to rise from 66% of total housing costs in 2005 to around 70% in 2006. This will put pressure on household finances and more than offset the expected benefit of lower mortgage rates.

The pricing variation between regions is likely to compress for the third successive year. Low single digit growth will be the norm for most regions. The biggest gains are forecast for Scotland (7%) and Northern Ireland (5%) where prices are lowest in relation to earnings.

Arrears and possessions are likely to remain low. The numbers of repossessions and cases of mortgage arrears both increased in the first half of this year, according to the CML. Both, however, remain at extremely low levels by historic standards.

Martin Ellis, HBOS chief economist, commented: "The UK housing market is set for a period of broad stability … Low, single digit, growth is expected to be the norm across most of the country."

"The cost of owning a home will increase driven, in particular, by bigger council tax and utility bills. Non-mortgage related housing bills could account for 70% of the cost of owning a home next year."

"Continuing economic growth, the high level of employment, robust earnings increases and the prospect of further interest rate cuts will support housing demand during the coming year."