The property market will remain subdued during 2006, with prices edging ahead by just 3%, Britain's biggest mortgage lender predicted today.

The HBOS economic forecast, which takes into account Halifax house price indices and official statistics, predicted that the average cost of a home would just keep in line with inflation during the year, meaning little change in prices in real terms.

The lender said the annual rate of house price inflation would peak at 7% or 8% in the middle of 2006, as modest price rises compared with slight falls during the same months of 2005, but the rate would then drop back.

The group said it expected earnings growth to outstrip house price rises during 2006, with average salaries increasing 4.5%.

This will help ease the house price-to-earnings ratio back from a peak of 5.6 in mid 2004 to 5.4 by the end of next year, making it slightly easier for first-time buyers to get on to the property ladder.

"The UK housing market is set for a period of broad stability, with house prices forecast to rise by 3%, broadly in line with the predicted rise in retail price inflation," said Martin Ellis, chief economist at Halifax.

He said that single digit growth was to be expected across most of the country.

"Continuing economic growth, the high level of employment, robust earnings increases and the prospect of further interest rate cuts will support housing demand during the coming year."

But the group did not expect a renewed surge in house price growth as the historically high level of house prices relative to earnings would curb demand, while rises in both council tax and utility bills would increase the total cost of running a home and offset lower mortgage rates.

On a regional basis, house price growth will slow most in Wales, Scotland and Northern Ireland, where it is still in double digits, the lender said.

In Northern Ireland, HBOS expects growth to slow from 16% during 2005 to just 5%, while in Wales it will ease from 14% to 3% and in Scotland it will drop from 10% to 7%.

Price gains will remain subdued in the south, with no change predicted for East Anglia. In the south-west, HBOS said, prices will edge ahead by just 1%, while the south-east should see gains of 2%.

The lender said this would help to further narrow the north/south price divide, predicting the average property in the south would cost 1.5 time more than one in the north by the end of 2006, compared with 1.6 times more now.