More property gloom as UK house prices set to stall next year, warns Nationwide

House prices rose by less than five per cent this year but could show no growth at all over the next 12 months, Britain's biggest building society warned today.

Nationwide said that its national house price index fell by 0.5 per cent in December following a 0.8 per cent fall in November.

That took the annual rate of house price growth down from it's November level of 6.9 per cent to just 4.8 per cent in December. That is the lowest rise since May 2006.

"The housing market has weakened significantly in the closing months of 2007," said Fionnuala Earley, chief economist at Nationwide.

"Turmoil in financial markets resulting from the US sub-prime mortgage issue and the problems experienced by Northern Rock have swiftly added to the pace of changing sentiment."

She warned that even if there are two or more cuts in interest rates next year the housing market is unlikely to bounce back strongly in the way it did after the last downturn in 2005.

Ms Earley said: "We are sticking with the forecast, which we made early in November, that house prices will be unchanged overall during 2008.

"But the risks now are clearly on the downside. There is not going to be a recession and there is still pretty much full employment. But there are now so many more uncertainties, particularly as a result of the credit crisis, than there were two months ago."

Ms Earley added: "It is true that lower interest rates will probably help market activity recover somewhat later in 2008, as lower house price growth restores some affordability and allows pent up demand from first-time buyers to be released.

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However, it seems unlikely that there will be a big recovery in activity and prices mirroring the 2005 experience.

"This time around lower interest rates are more likely to stabilise market activity, rather than re-ignite it," she said.

Nationwide said that following the credit crunch all banks had tightened their lending rules and, in particular, had made much less money available to borrowers at the riskier end of the borrowing spectrum.

Nationwide's major rival Halifax is also predicting no house price growth in 2008 and one leading consultancy, Central Economics which is run by Roger Bootle, has forecast a 3.5 per cent fall in prices next year.

London and the South-East towns and cities dominated Nationwide's list of the strongest rising house prices during 2007.

St Albans remained the most expensive town in the UK with an average house price of almost £350,000 against an average of £329,000 in London.

Oxford is still the second most expensive place to live with average prices at £340,000. But its academic rival Cambridge slipped out of the top 10 with an average price of just £306,000.