House prices are more likely to fall than increase over the coming months, the Bank of England warned yesterday.

Kate Barker, a member of the Bank's interest rate-setting committee, said despite recent falls, house prices were still overvalued.

In a speech to the Institute of Economic Affairs, she said the future direction of house prices remained uncertain, but added: "In view of the evidence on affordability and the balance of arguments about overvaluation, the likelihood of some decline in prices, at least relative to earnings, seems now to be much greater than that of a further significant increase."

Almost all housing market indicators have weakened sharply in recent months, although data last week on prices and mortgage lending suggested the decline may be bottoming out. City experts are divided between those arguing prices will stagnate for a few years, allowing average earnings to catch up, and those predicting prices could fall by 30% over the next two to three years.

Ms Barker suggested that the first quarter was likely to be as weak for the housing market as the fourth quarter of 2004 had been. Prices rose only 0.1% in October to December from the previous three months, the slowest quarterly rise in nearly five years, according to data from the Halifax.

The other major index, from the Nationwide, is due on Thursday and will give figures for January. Its December report showed a fall of 0.2% on the month, although the Halifax showed a 1.1% rise for the same month.

Ms Barker said house prices had risen rapidly in recent years because of low interest rates, a lack of new housebuilding, and a growth in investment buying.

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