House prices will continue to rise over the next two years, but housing transactions are likely to fall in 2008 after a small rise in 2007, according to the latest housing market forecasts from the Council of Mortgage Lenders.

The CML expects prices to rise by 7% in 2007 and 5% in 2008.  However, rising prices will stretch affordability even further, so the CML expects property transactions to fall from 1.19 million in 2007 to 1.13 million in 2008.

Gross lending will rise from around £345 billion this year to £360 billion in each of the next two years, while net lending will rise from £108 billion this year to £120 billion next year, before falling back to £115 billion in 2008.

Loans for house purchase will rise from £169 billion this year to £186 billion in 2007 and £187 billion in 2008. Loans for remortgaging will fall from £141 billion this year to £140 billion in 2007 and £139 billion in 2008. Behind this is a modest fall in the number of remortgages between lenders reflecting the efforts lenders are making in retaining existing borrowers.

Borrowing by buy-to-let investors will rise more quickly than borrowing by home owners. It will account for 13% of gross lending in 2007 and 14% in 2008, up from 11% in 2006.

The outlook for households facing mortgage repayment difficulties remains more challenging than in the recent past. The number of possessions rose more sharply than the number of longer-term arrears in 2006, but the overall number of mortgages in arrears has started to fall.

Despite this, the recent rises in interest rates will push up the number of mortgages in arrears of more than three months during 2007/8. They will rise from 105,000 at the end of 2006 to 130,000 at the end of 2007 before falling back to 120,000 by the end of 2008. Possessions are likely to total around 18,000 for each of these three years, higher than in the recent past, but stable and well below historical levels.

The authors of the forecasts, CML economists Jim Cunningham and Paul Samter, comment: "The strength of demand relative to supply will remain a structural feature of the housing market for the foreseeable future. This means that, in the absence of major shocks, house prices are likely to rise above current levels in relation to income.”

"But affordability, measured by the size of deposit required and the percentage of income needed to service the mortgage of a new borrower, is stretched.  Although changes to lenders' policies, product innovations and support from relatives will continue to help some people into home-ownership, there is a limit to how far these measures can go.”

“Movers, too, are likely to find it increasingly difficult to trade up as price differences between properties widen.  This suggests it will become progressively more difficult to put chains together and that this will constrain the total number of sales."