House prices to rise 7% this year

House prices look set to increase at more than three times the rate previously predicted this year, an industry body said today.

The Council of Mortgage Lenders expected the value of the average UK property to rise by 7% during 2006, well up on the 2% it forecast in February.

But it warned that the more buoyant property market was also likely to contribute to interest rates being increased, which would lead to more people falling behind with mortgage payments and having their homes repossessed.

The group now expected about 1.2m properties to change hands this year, up from the 970,000 it had previously predicted.

Mortgage lending was also expected to be more buoyant than it had forecast, with lenders advancing £310bn during 2006, 9% more than expected. Net lending, which stripped out redemptions and repayments, was predicted to be 25% higher at £100bn.

The CML still expected the property market to be weaker in 2007 than it is this year, but has nevertheless revised its forecast for house price inflation for the year to 3% from 2%.

It predicted that net mortgage lending would be £85bn, up from the £75bn previously expected.

However, the group was also revising its interest rate forecasts and now expected the cost of borrowing to be 4.75% rather than 4.5% at the end of both 2006 and 2007.

A rate hike bringing higher borrowing costs was likely to feed into slightly higher levels of arrears and repossessions, the CML warned.

It now expected 130,000 people to fall at least three months behind with their mortgage repayments by the end of 2007, 10,000 more than it had previously forecast.

At the same time it forecasted that about 15,000 people would have their homes repossessed in both 2006 and 2007, compared with its previous estimate of 12,000 in each year.

Jim Cunningham, CML senior economist, said: "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."

Prospects looked brighter for 2008, Mr Cunningham said, when lower inflation was expected to see interest rates reduced. "This in turn should support demand from home-buyers and buy-to-let investors and result in firmer house price growth," he said.