British house prices are expected to grow at a much slower rate in 2004 but economists say the trend will still be up despite warnings of further interest rate rises.
After reaching a 48-year low of 3.5 per cent, interest rates moved up last month to 3.75 per cent and are expected to reach around 4.5 per cent by the end of 2004. The fall in base rates has been a major factor in Britain's housing boom with prices up 53 per cent in the past three years.
After house price increases of more than 20 per cent in 2002, many economists predicted 2003 would see a sharp slow down but the latest figures from the Halifax and Nationwide Building Society show house prices have grown between 14 and 15 per cent so far this year.
Next year, economists at Nationwide predict house prices will grow at around 9 per cent, although others said growth was likely to be lower at around 5 per cent. Most economists are more comfortable betting on a slowdown in growth rather than a crash or fall in house prices.
The main threat to strong house price growth is weaker household incomes and rising interest rates. Nationwide Group Economist, Mr Alex Bannister, said nominal pay growth was likely to rise around 4.5 per cent per annum over the next 10 years compared with 10 per cent in the 1980s and 5.1 per cent in the nineties.
However, even if interest rates stay the same house price growth will still slow because income growth is so poor, said Steven Andrew, chief economist at funds management group ISIS.
The decline of the first time buyer will also influence the market, said Mr Richard Donnell, head of residential property research at property company FPD Savills. He thinks house prices will only rise 4 per cent next year and 10 per cent over the next three years.
"First time buyers are the fuel that feeds house prices from the bottom of the market upwards and any sustained absence could have an impact on values in 18 to 24 months time," said Mr Donnell.