Northern Rock predict house price slowdown

Northern Rock, the UK mortgage lender, have suggested that house price inflation will slow quite suddenly by the end of 2007.

Although house price inflation is currently running at about 10%, the lender suggests that this level is likely to fall quite dramatically - by the end of the year, it may be that house price inflation drops to nearer 4%.

This is an interesting statement, as we are already seeing that the headline rate of house price inflation (HPI) hides regional differences. For instance, both Northern Ireland and Greater London are performing at well above the headline rate of growth.

In order for the overall rate of HPI to fall to 4% by the end of December, it would surely involve some relatively large decreases in house prices in some areas (particularly when you take into account the current rate of inflation).

Rising interest rates are undoubtedly already hitting affordability in some areas and it will be interesting to see how the Bank of England react to news that house price growth is showing clear signs of slowing. Will they feel the need to keep increasing interest rates, or do these indicators suggest that interest rates are about to peak?