Bills, not mortgages, strain housekeeping

HBOS yesterday predicted house prices would rise 8% next year but issued a "tax warning" to borrowers who are facing higher costs to run their homes.

The country's biggest mortgage lender blamed higher council tax and utility bills for its warning that the cost of owning and running a home was rising significantly even though mortgage rates have been at 50-year lows.

Between 2001 and 2002, HBOS calculated the cost of owning and running a home had risen four times faster than inflation. The average homeowner spends £5,604 on running a house, including mortgage repayments.

HBOS tried to play down fears that owning a home was becoming unaffordable saying that even if base rates reached its predicted level of 4.5% by the end of 2004, from 3.75% now, home owners would be spending 16% of their income on their homes, lower than the long-term average of 22%.

By forecasting an 8% rise in house prices for next year, HBOS is admitting that it expects a slowdown in house price rises from this year's 15% and the 26% achieved in 2002.

The rise of 8% is closer to the longer term average of the past 20 years. The bank admitted there was a risk that it was underestimating the increase because the three pillars that had underpinned the market - low interest rates, high employment and affordability - would continue next year.

A large slowdown in price rises is forecast in the north, where prices have risen almost 60% in the past two years. Even so, HBOS believes they will continue to rise by 17% in 2004. Rises of 3% are predicted for the south east and south west of England where prices rose 6% this year. Greater London is forecast to achieve the average rise of 8%, the same level as 2003 but below the long-term regional average of 10%.

HBOS issued its predictions as it updated the City on its expectations for 2003 profits, to be published next year.

It expects its share of new mortgage lending to be 23% but said its profit margins would be hit by strong competition in the retail market. This helped to depress its share price which fell by 15p to 703p.