Nationwide has warned that house price inflation will drop from the current rate of 9.7 per cent to 0 per cent by this time next year.
In its house price forecast, the lender says that 2008 will see a slower economy, stretched affordability, tighter credit conditions and lower buy-to-let demand which will all take a bite out of house price inflation.
Nationwide says that interest rate cuts and tight supply will provide some support to price growth but this is unlikely to prevent a significant slowdown.
Nationwide chief economist Fionnuala Earley says: “House prices recorded another strong year in 2007, underpinned by significant economic momentum, ongoing housing shortages and strong buy-to-let demand.
“We forecast house price growth of 5-8 per cent in December last year, and with two months left to go it looks like the middle to upper end of this range will be achieved. That being said, momentum is now fading, and a number of factors suggest that house price inflation will drop from its current rate of 9.7 per cent to 0 per cent by this time next year.
She says that the main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity.
“The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building. These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK.”