Housing market 2006 - Nationwide says 0-3%

Nationwide Building Society is forecasting house prices to rise by between 0% and 3% in 2006. That's because despite a cautiously optimistic view on the economy it says affordability will remain a brake on house price growth.

Fionnuala Earley, Nationwide's Group Economist, makes the point that the current housing market slowdown has largely been driven by consumers, as higher interest rates and fuel payments have left them with less discretionary income to spend; hence the disproportionately hard times seen in the retail sector.

As oil prices fall out of the equation, reducing the Bank of England's inflationary concerns, the Society expects there to be room for at least one further cut in interest rates in 2006, which should help to stimulate the economy back to trend growth by 2007.

It doesn't expect the recent pickup in mortgage approvals to herald a significant increase in prices next year however because the market is still 'clearing' as expectations settle. Buyers no longer expect prices to fall significantly and sellers don't expect them to rise significantly either. This has made agreeing a price easier and has introduced liquidity into the market and been reflected in activity rather than prices.

"Expectations are a key factor in the housing market, as they reflect not only peoples' views about likely capital gain, but also their confidence in the market. During 2005 we have seen these expectations stay broadly neutral, but with a positive impact in later months as consumers have felt increasingly confident that a soft landing has been achieved," says Sweeney. The likelihood is that this trend will continue.

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