Nationwide: 0% house price growth in 2008

A study released today predicts house price growth will fall to zero over the course of 2008.

Forecasts from the Nationwide building society suggest average annual price growth will fall from the 9.7 per cent recorded in 2007 to nothing over the coming year.

This could mean prices actually fall in real terms.

The change will largely be the result of a slowdown in the wider economy.

House prices were supported by the strength of the British economy throughout 2007, especially in the financial and manufacturing sectors, but this is set to change over the coming twelve months.

Nationwide expects economic growth to slow from three to two per cent during the next year and combined with stretched affordability, tighter lending conditions - caused by the credit crunch - and low buy-to-let demand, house prices will stagnate.

"The buoyant economy proved supportive of buyer confidence and helped keep housing demand at high levels, particularly during the first half of the year," said Fionnuala Earley, Nationwide's chief economist.

"Yet, as we move into 2008, economic tailwinds are increasingly being replaced by headwinds."

Lower disposable incomes - with petrol at over £1 a litre - and high interest rates have also proved to be detrimental to the property market, reducing demand.

A fall in demand from the buy-to-let sector will also force prices downward.

"As interest rates and house prices have risen, rental yields have become much less attractive and investors have had to rely on house price growth to deliver good returns," said Ms Earley.

"As the slowing economy causes house price expectations to be revised down, there is likely to be less interest in new buy-to-let investments, particularly from those with shorter investment horizons."

However, a shortage in supply will ensure prices do not fall.

"The supply-side of the market will still be characterised by widespread housing shortages, in spite of government targets to increase house building," continued Ms Earley.

"These shortages will provide some offsetting support to prices amid the weaker demand environment, particularly in the south of the UK."

Across the country Scotland is expected to see some gains in prices, with the average property increasing four per cent in value.

London and the south-east will also see gains of around one per cent.

However, Northern Ireland will see prices down five per cent, after a year of impressive growth, while the north can expect falls of around four per cent, according to Nationwide.

However, the predictions have been dismissed by some.

"The Nationwide, like most building societies, tends to significantly underestimate house price inflation at the beginning of each year. Next year appears to be no different, with today’s prediction of zero per cent. In contrast, I would expect house prices to increase by five per cent in 2008," said Stuart Law, chief executive of Assetz.

Commenting on the buy-to-let market, Mr Law adds: "Buy-to-let demand is strong and with rents rising buy-to-let investors look to make more profit than ever on rental income, particularly with interest rates expected to come down by as much as 0.75 per cent over the next year."