House prices 'to rise by 10%' rise

Mortgage lenders delivered a vote of confidence in the housing market yesterday by almost doubling their forecast for house price inflation this year to 10%. The upgrade from 6% reflected the unexpected strength of the labour market, said the Council of Mortgage Lenders, which represents banks and building societies.

The CML's earlier forecast assumed an increase in unemployment as the economy slowed. But, with the jobless total continuing to fall, boosting consumer confidence, it said there were good reasons to expect the pace of house price increases and the number of transactions to accelerate. The number of properties changing hands is predicted to reach 1.48m in 1999, up from the previous forecast of 1.42m.

However, the CML repeated that it did not expect a rerun of the 1980s boom-bust because the underlying economy is more stable.

In addition, it says, the Bank of England's monetary policy committee, which was founded in 1997, will be much more inclined to raise interest rates than were politicians. The MPC has already raised interest rates once to safeguard the government's 2.5% inflation target, in part because of the bullish housing market, with further increases thought likely before Christmas.

It noted that the recovery in house prices, once confined to a few hot spots, was spreading, boosting consumer spending.

With higher interest rates likely to cool the housing market, the CML predicts that house price inflation will fall to 8% in 2000 and 7% in 2001. But it does not expect this to prevent a pick-up in activity.

The relatively healthy economic backdrop will ensure that transactions continue to increase to 1.525m next year and 1.55m in 2001.

"Net lending will increase over the forecast period, reaching £35bn in 1999, rising to £42bn in 2001. This reflects both higher house prices and increased activity. It is also possible that there may be some substitution of unsecured credit with secured borrowing as a result of low mortgage rates," the CML said.

While it expects base rates to go above 5.25%, it does not anticipate them topping 6.5%.

A separate report from Barclays shows that optimism about house prices is shared by homeowners. It found that 58% believe their homes will increase in value over the next 12 months.

Jim Chadwick, director of mortgages, said: "As consumer confidence continues to rise the outlook for the housing market up to the new millennium remains steady. We don't expect to see the high levels of lending seen over the past couple of months continuing in the long term. However, neither do we expect to see a dramatic fall in lending."