Housing market set to cool down

Mortgage lender Northern Rock today predicted that house prices will come off the boil in the next few months, but said it was well-placed for a slowdown in the housing market.

Northern Rock, which has an 8.5% share of the market for home lending, said it expected house price inflation to return to more sustainable levels over the next nine months of about 3% a year. In a house price survey this week, the Nationwide the building society reported that house prices in September were 15.5% higher than a year ago.

"I think house price increases will settle down next year to single figures," said David Baker, chief operating officer of Northern Rock. "The market is expecting a small increase in interest rates but from a very low base, so affordability will remain. An increase would not affect people's ability to pay back loans and certainly not mortgages."

The City widely expects an increase in the cost of borrowing, possibly by the end of the year amid signs that economic growth is picking up. Revised data from the Office for National Statistics this week showed that the UK economy grew 0.6% in the second quarter, twice the pace previously estimated.

But in a speech in Switzerland yesterday, the Bank of England's chief economist, Charles Bean, muddied the waters when he said how "extraordinarily difficult" it was to know how much to raise rates, if at all, to prevent a bubble in the housing market an excessive build-up of debt.

Northern Rock, however, played down any notion of a collapse in the housing market.

"A rise in UK rates may well have dampening impact on total household borrowings," the mortgage lender said, "but with a more noticeable impact on unsecured and credit card volumes, rather than home loans."

Northern Rock said its small size, greater flexibility and low unit costs ensured that it was well-positioned to weather any slow-down in the housing market. The bank, one of the smallest but also the most efficient of Britain's major mortgage lenders, expects 2003 pre-tax profits to come in at the top end of analyst expectations, between ?356.2m and ?378.7m.

The company is to close 20 small branches in the north-east and open 10 new flagship branches in key cities where it has not had a presence. Northern Rock said it did not expect any compulsory redundancies from the changes, which will cost around ?5.5m. The group said it would meet its lending expectations in 2003 and its target of annual growth in assets under management of 20%.