Nationwide is warning that there is growing potential for a drawn-out period of low activity and low price growth in the housing market.
Its monthly house price index shows that prices rose by 1.9 per cent in May. The annual rise is 19.5 per cent.
However, its forecast for the 12 months to December 2004 remains at 15 per cent, implying an average monthly rise of just 0.7 per cent for the remainder of the year.
Group economist Alex Bannister expects a combination of muted after-tax earnings' growth, further interest rate rises and a downgrading of homeowners' price growth expectations to slow the market.
He suggests that with many potential first-time buyers unable to enter the market and debt burdens preventing homeowners from moving up the ladder, there is potential for a period of low activity and low price growth.
Bannister says a more hawkish tone from the Bank of England's monetary policy committee on the pace of consumer spending, borrowing and the housing market have driven interest rate expectations higher.
Although the market is pricing in short rates of 5.3 per cent by the end of the year, Nationwide expects a year-end base rate of 4.75 per cent to be sufficient to meet the inflation target.
Bannister says demand for property remains high, with the decline in first-time buyers being offset by the rise in buy to let. He says: “In the absence of a recession and large increases in unemployment, significant downward pressure on prices would be unlikely.”