A tight market and a lack of new houses, particularly in London, have kept prices rising, but there are signs that a slowdown is under way. In the past three months, house prices have risen at half the rate (2 per cent) of the previous three months. Number of visits to estate agents are down, and so are mortgage approvals. For 2007 we expect house prices to rise by 4 per cent; the smallest increase since 1995.

Recent interest-rate rises and the chance of another rise in spring are starting to make homebuyers more cautious. There are also other pressures on household budgets which should contribute to a slowing in housing demand. Petrol prices, utility bills and council tax charges have risen quickly in the past year.

Yet the economic fundamentals underpinning the market are sound. The UK economy is approaching a record 60th successive quarter of economic growth, while rising employment will support housing demand this year. A lack of supply should also support prices. About 170,000 private-sector new homes are expected to be built in 2007, falling well short of the 220,000 new households that are created each year.

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