The company said on Thursday that it expected house price inflation to return to the rate of earnings growth over the next nine months.

That would reduce average house price growth to just over 3% a year, down sharply from leading mortgage lenders' current estimates of between 15% and 19%.

However, Northern Rock moved to dispel fears of a property market slump, saying a sound economy would ensure that demand for mortgages remained buoyant.

The company said steady economic growth and continued low levels of unemployment would underpin the mortgage market for the remainder of 2003 and 2004.

Rate effect

The lender also played down recent warnings that a rise in interest rates could have a disproportionate effect on house prices by deterring heavily indebted consumers from buying property.

It said higher borrowing costs were likely to have a "more noticeable impact" on unsecured loans and credit card use than on demand for home loans.

Northern Rock added that high levels of consumer debt would enable the Bank of England to curb excessive demand through smaller than usual increases in interest rates.

The lender's property market outlook came as it reported strong growth in its mortgage business, with net residential lending for the first nine months of 2003 up by 41% on the same period last year.

It added that there was no sign that its customers were having difficulty repaying their home loans, with three month arrears standing at about half the industry average.