The Council of Mortgage Lenders has revised up its forecasts for housing market activity for 2006 and 2007.

The CML now expects house prices to end the year 7% higher than at the start, compared with a 2% forecast back in February. Next year, the forecast for house price inflation has been raised from 2% to 3%.

Property sales are also now set to be stronger than the CML expected back in February, prompting a rise in the forecast for this year to 1.2 million (up from the previous expectation of 0.97 million).

This increased strength is reflected in the CML's revisions to its lending forecasts. Gross lending is now expected to reach £310 billion this year (up from £285 billion previously forecast), although the CML sticks with its previous forecast of £285 billion next year. Net lending is now predicted to total £100 billion this year (up from the £80 billion forecast in February), before falling back to £85 billion next year (up from £75 billion).

Rates and repossessions

Unfortunately, the very strength of the housing market is one of the reasons why the CML now expects interest rates to end both 2006 and 2007 at 4.75% rather than the 4.5% previously forecast.

And this in turn feeds through to modestly higher forecasts for arrears and possessions. The CML now foresees 130,000 rather than 120,000 mortgages in arrears of over three months by the end of 2007, and 15,000 repossessions in both 2006 and 2007 (up from the previous forecast of 12,000).

Jim Cunningham, CML senior economist and author of the forecasts, observed: "The immediate signs are that demand will remain robust over the next few months. But we take the view that confidence and activity are closely associated with interest rate movements and expectations."

"The small rise in short-term interest rates expected in the second half of this year and the rise in fixed-term rates that we have already seen is likely to result in a modest fall in the level of transactions in the second half of this year, and we expect this to continue into 2007."

"At this distance, prospects for 2008 look brighter. The more benign inflation outlook is expected to result in lower interest rates by early 2008. This in turn should support demand from home-buyers and buy-to-let investors and result in firmer house price growth."