Homeowners warned to expect price falls next year

House prices and sales could fall in some areas next year as affordability problems and a drop in turnover expose markets that have enjoyed price booms in recent years, a leading property analyst said yesterday.

The market is to slow in 2007 to 4 per cent - in line with inflation - compared with an expected 5 or 6 per cent for this year, Hometrack said. However, it said that 4 per cent included a divergence between the top-performing region, Northern Ireland on 9 per cent, and bottom-of-the-table East Midlands and Wales with 1 per cent.

Gary Styles, director of risk at Hometrack, said: "There will be some areas that will experience falls somewhere at the sub-regional level. These are quite significant risks if you are lending 95 per cent loan-to-value. There are risks in sub-regional markets."

Hometrack published a map showing that while northern and Celtic regions had experienced 85 per cent price growth over the last four years, in areas such as Wales and Cornwall this had been achieved on sales of less than 4 per cent of the stock last year.

Richard Donnell, its director of research, said: "The question is which of those areas were simply cheap and which were linked to economic growth."

He acknowledged Hometrack had got its forecasts for 2006 of 1 per cent growth a year ago wrong, because it underestimated growth in London.

He agreed the risk was for house prices to again overshoot its target in the short-term. "But I believe that there is a danger of storing up longer-term problems."

He said a housing market with high prices, little new housebuilding and low turnover raised problems for first-time buyers, who now made up just 14 per cent of sales.

"This is a key area of potential risk as a two-tier market is unlikely to be sustainable over the medium term," he said.

Mr Donnell said house prices would continue to be supported by the mismatch between demand and supply of properties, although again this would operate in vastly different ways across regions. While London is expected to fall short of 12,000 homes a year needed for the expected growth in households, the North-west is likely to show an excess supply of 6,000 a year.

There was fresh evidence of pressure for further price rises yesterday from figures showing underlying mortgage lending rose by £5.5bn in October, after £5.4bn the previous month, according to figures from the British Bankers' Association. Gross mortgage lending hit a monthly record for October at £30.3bn, according to the Council of Mortgage Lenders, up from £29.2bn in September.

"With mortgage activity currently still relatively buoyant and a shortage of supply in many areas, house prices are likely to remain robust in the near term," said Howard Archer, an economist at Global Insight.