HBOS raises house price forecast

HBOS raises house price forecast

Britain's biggest mortgage lender today upped its house price growth forecast for this year to 6% after being caught out by the property market's stronger-than-expected performance.

The Halifax Bank of Scotland (HBOS) group also increased its regional forecasts, and now believes London house prices will end this year up 12%. Originally it was predicting prices in the capital would rise 8% this year.

The new forecasts are likely to delight many homeowners worried that, with five interest rate rises in the space of a year and predictions of another soon, house price growth might come to a halt. But they will not be welcomed by prospective first-time buyers already struggling to buy.

Today also saw new data published showing that gross mortgage lending hit a new record of £34.2bn in June.

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In December, HBOS said it believed UK prices would rise by 4% this year. But today it said it had revised this upwards to 6%, to reflect "the greater upward movement in prices than expected during the first four months of the year". This was largely driven by a combination of stronger economic momentum and more acute supply shortages than predicted.

"Housing market fundamentals are sound," said the lender. "Shortage of properties for sale – both new and old - will also support house prices. Recent official household projections suggest the shortfall in new homes being built is more acute than previously estimated."

However, HBOS believes that greater pressure on household finances following the string of rate rises is likely to reduce the rate of house price growth over the coming months. "The increase in mortgage rates – both for fixed and variable products – since last summer is having an effect on housing affordability, and will increasingly bite over the second half of the year."

The bank believes Northern Ireland will be this year's property price winner, with an anticipated 23% rise following last year's 53% leap in values. London and Scotland are the only other regions it believes will enjoy double-digit growth, with the latter likely to see a 10% rise.

By contrast, homeowners in Wales will have to make do with a 1% rise, while those in the Midlands can expect a 2% increase in the value of their property, if HBOS is to be believed.

Martin Ellis, the group's chief economist, said: "While house price growth was stronger than expected during the early months of 2007, there are now more signs that the market is slowing. We expect this trend to continue. House price inflation should ease over the second half of the year."

Nationwide building society originally predicted house prices would rise 5%-8% in 2007, and said in May that it was leaning towards the top end of this range.

But some will be sceptical about their powers of prediction. In recent years Britain's housing economists have repeatedly had to rip up their price predictions in the face of the property market's stronger-than-expected performance.

Separately, the Council of Mortgage Lenders said gross mortgage lending reached £34.2bn in June - up from £31.4bn in May. Its director general, Michael Coogan, said: "Despite the record level of mortgage lending, there are signs that the market is feeling the cumulative effects of the five interest rate rises we have seen over the past year. This effect will become much more evident in the coming months as borrowers with fixed-rate mortgages come off their existing deal into a significantly higher interest rate environment."

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