Nationwide said this morning that it expects the rate of house price growth in 2007 to be relatively robust at between 5% and 8%. Momentum gathered in 2006 will flow into the early part of 2007, and this will be supported by a buoyant economy, stable interest rates and a continuing shortage of housing supply.

Fionnuala Earley, Nationwide’s Group Economist, said the lender expected to see a few months of double-digit annual house price inflation in the first half of the year. “However, increasingly poor affordability and likely cutbacks at the Bank of Mum and Dad will cause the rate of house price growth to move back into single digits in the latter part of the year," she commented.

The recovery of London and its surrounding areas will play an important part in the profile of house price growth in 2007. “We expect house prices in London to lead the way and increase by 10%, partly reflecting the relative underperformance of the capital in the earlier part of 2006,” said Ms Earley.

The North and Midlands can expect to see more modest growth than the South with house prices growing at around 3-4% in line with earnings growth. “Northern Ireland and Scotland cannot expect to see house price growth on the scale experienced in 2006,” said Ms Earley. “Such strong rates of growth are supported by the recent strength in both economies’ labour markets and also reflect some element of catch-up as the earnings gap to the UK in both countries has narrowed over the last three years. However, such rapid growth rates are not sustainable in the longer term. We expect house price growth of around 9% in Scotland and 12% in Northern Ireland in 2007.”

Momentum

On momentum in the housing market Ms Early commented: “Tight demand conditions reported by estate agents in the latter part of this year have not yet shown any signs of easing and this will support house price growth early next year.”

Due to inherent lags in the response of the housing market, a rise in mortgage approvals tends to be reflected in higher house price inflation around seven months later. If the relationship holds, this would suggest that house price inflation will continue to accelerate in the first few months of 2007, but will cool more sharply in the second half of the year as house purchase approvals weaken.