House prices 'to rise by 4% in 2006

Interest rate cuts and "robust" growth in employment will help speed up growth in UK house prices next year, research predicted today.

The Royal Institution of Chartered Surveyors (Rics) said it expected prices to rise by 4% in 2006 and by the same amount in 2007, following a 3% upturn this year. Mortgage approvals are also expected to rise from a five-year low of 1.13m in 2005 to reach 1.34m as the property market shows signs of picking up. Publishing its housing market forecast for 2006, Rics said the "modest" upturn in house price rises next year would reflect the recent cut in the cost of borrowing. It also took into account expectations of a further 0.25% reduction in interest rates in the coming months.

The group said: "Low interest rates along with robust growth in employment go a long way to explaining why house prices have increased this year and will continue to do so next year."

A report from Rics last month reported signs that the housing market was strengthening, with the number of people thinking of buying a house rising for the fourth month in a row in October. The group said today that employment growth had been strong considering the slowdown in economic growth, while earnings had risen firmly.

A key indicator that the housing market was past its low point, Rics said, was that the number of mortgage approvals had rebounded strongly, hitting 113,000 in October against an average of 100,000 over the past decade.

Housing activity was also likely to maintain current growth levels in 2006, with an estimated 13% rise in sales compared with this year. A series of recent house price indexes have suggested the property market may have turned a corner. But today's predictions from Rics are ahead of those of building society Nationwide, which forecast last week that property prices would increase by between 0% and 3% in 2006. Nationwide said it was "cautiously optimistic" about the housing market over the coming year, expecting it to be "fairly stable".

The Council of Mortgage Lenders (CML) last week revised up its forecast for price rises this year to 4% and predicted that they will rise by 2% annually over the next two years.