Nationwide expects the rate of house price growth in 2007 to be relatively robust at between 5 per cent and 8 per cent . Momentum gathered in 2006 will flow into the early part of 2007 and this will be supported by a buoyant economy, stable interest rates and a continuing shortage of housing supply. We can therefore expect to see a few months of double-digit annual house price inflation in the first half of 2007.however, increasingly poor affordability will cause the rate of house price growth to move back into singly digits in the latter part of the year.
The recovery of London and it s surrounding areas will play an important part in the profile of house price growth in 2007. We expect house prices in London to lead the way and increase by 10 per cent , partly reflecting the relative underperformance of the capital in the earlier part of 2006. Some of the rest of the increase will be driven by strong demand at the tope end of the market as London asserts itself as a major global centre for financial services. The success of the financial markets has benefited the London economy and high bonuses can be expected to add a further boost, while investment in infrastructure in the run up to the Olympics and the completion of other central London developments will also support prices in the capital.
The North and Midlands can expect to see more modest growth than the South with house prices growing at around 3-4 per cent in line with earnings growth, but also reflecting that housing supply shortages are not evenly spread across the UK. The more severe housing shortages are in the South of the country while in the North, Wales, Scotland and Northern Ireland there is much less of a mismatch.
Overall the economic background in 2007 will be fairly supportive for the housing market in England, on balance; we expect interest rates to remain at 5 per cent during the year in spite of the risk that higher inflation will feed into pay settlements. This is largely because higher levels of immigration and labour force participation have kept wage inflation subdued until now but also because we see some vulnerability in the outlook for consumer spending. On the one hand, these ease inflationary pressures and reduce the need to increase interest rates again. On the other, stretched budgets mean that affordability will continue to worsen and this will contribute to the slowing the housing market that we expect in the second half of the year.
