House prices in the UK are set to rise in 2006, although any gains will be small, according to Nationwide.
Nationwide says it is 'cautiously optimistic' about prospects for 2006
Britain's biggest building society said at best prices would grow by 3% over next year, following gains of 2.4% this year and 12.7% in 2004.
But Nationwide warned prices may also stagnate, while many new buyers would continue to struggle to afford homes.
The Bank of England last month said it saw signs of "a strengthening of activity in the UK housing market".
House prices would remain "broadly stable" during 2006, the Bank said in its quarterly inflation report.
Nationwide said it was "cautiously optimistic" for the prospects of the UK housing market next year.
"Our expectation is that house price growth will remain firmly in low single digits in 2006 as the economy recovers," said Nationwide economist Fionnuala Earley.
"With rapid price increases over the last nine years it will take some time for affordability to recover," she said.
Nationwide warned that in the first few months of 2006 year-on-year house prices could fall, compared to strong growth in early 2005.
But the group outlined several reasons why it thought house prices would not crash in 2006 including:
- Demand for houses outstripping supply, with around 30,000 more new households formed each year than properties built
- The expectation that interest rates would stay low and as a result peoples' debt repayments would be manageable
- Unemployment and house repossessions to remain stable.
The group added that it thought buyers and sellers were now accustomed to lower levels of house price inflation and as a result it was becoming easier for both parties to agree sales.
But Nationwide warned that if the economy did not recover as it expected then house prices could fall in 2006.
The accuracy of lenders' house price inflation predictions seems to have improved of late.
During the housing market boom, both the Halifax and Nationwide lenders dramatically underestimated the rate at which property prices increased.
However, Nationwide said house prices would rise 2% during 2005, in the end they rose 2.4%.