House price inflation in the UK is set to slow to an annual rate of 9% next year, according to HBOS bank.

We expect there to be a gradual slowdown in house price inflation rather than anything more dramatic Martin Ellis, HBOS

The bank said the easing of prices would come about as first-time buyers found it increasingly difficult to get onto the property ladder and withdrew from the market.

It added that higher interest rates would also help to cool the market, forecasting a rise in the base rate to 4.5% by the end of 2003.

Recent house price surveys by mortgage lenders have shown prices rising at an annual rate of between 20% and 30%, but most housing experts are expecting a slowdown next year.

No crash

On Monday, a report by economic consultancy Capital Economics warned that the UK property market was severely overvalued, and that prices could fall by up to 30% over the next few years.

But in its economic forecast for 2003, HBOS said while the market is set to cool, there was little danger of a crash.

"The difficulties that increasing numbers of first-time buyers are facing in getting a foot on the housing ladder will curb demand causing house price growth to slow," said HBOS chief economist Martin Ellis.

"The continuation of low interest rates, low unemployment and the low proportion of earnings taken up by mortgage payments for a new borrower will, however, provide a solid foundation for housing demand.

"As a result, we expect there to be a gradual slowdown in house price inflation rather than anything more dramatic."

Closing the gap

HBOS said the gap in prices between the north and south of Britain would narrow next year.

The north of England is forecast to see rises of 16%, while properties in Scotland are set to increase by 12%.

In London, prices are predicted to rise by just 2% in 2003, because of a combination of job losses in the City, smaller bonuses and the falling stock market.

On Monday, the property website Rightmove said prices in London fell by 2.6% in November, and that overall house prices in England and Wales were rising at an annual rate of 22.1%.

The last house price survey by the Halifax - which is part of HBOS - said prices were rising 29.2% a year.

On track

HBOS said that the strength of the UK's housing market would help it to meet analysts' forecasts for its full-year results.

It said profits for 2002 should come in between �3.05bn and �3.32bn.

But following a change to its accounting system, �100m will be cut from the profits figure and the 2001 results will also be �240m lower than previously reported.