SO the housing-market crash that some analysts predicted for this year has been avoided. Instead, the soft landing that the Bank of England was hoping for appears to have been achieved. Nationwide building society expects house prices to end the year 2.3% higher than they were at the beginning of 2005. And economists predict more of the same next year.

Fionnuala Earley at Nationwide said: “As additions to housing supply continue to lag the rate at which households are formed — through weddings, partnerships and divorces — by about 30,000 a year, there will be demand pressures. This will be helped by a benign economy with a favourable interest-rate environment, helping to keep debt-servicing costs low.

“Confidence will support prices but that is not expected to offer an immediate boost. We think prices will rise between 0% and 3% in 2006.”

Nationwide’s prediction is in line with the consensus, as most analysts predict growth of less than 3%. The most bullish forecasts are from mortgage broker John Charcol, property website Rightmove, and the Royal Institution of Chartered Surveyors. Charcol is predicting house-price growth of 5.5%, while Rics and Rightmove both think prices will rise by 4%.

Drew Wotherspoon at Charcol said: “Interest rates are by far the most important influence on house prices, and we expect rates to fall further in 2006. We think there will be at least two, but probably three, quarter-point cuts, which would take base rate to 3.75% by the end of the year. This should stimulate a gentle upward movement in prices as confidence and affordability improves further.”

However, Capital Economics believes house prices will fall slightly next year. Ed Stansfield at the consultancy said: “We still feel the market is in a fragile state, and that we are likely to see moderate falls in 2006. We think that the recent reports of recovery, increased mortgage lending and the tentative signs from consumers that things are improving may prove short-lived. It is still too early to say that the market has turned.”

Although the average house price nationally has risen this year, some towns have seen property values fall. Prices in Clevedon, Somerset, for example, fell 9% in the year to September, according to Halifax. Properties in Bromley, Kent, saw falls of about 7% over the same period and the average cost of a house in Chester dropped by 4%.

These regional differences are expected to continue next year. Savills, an estate agent, believes that house-price growth will be flat in 2006, but adds that its prediction of 0% growth masks a mixed story. Jim Ward at Savills said: “Behind that figure we think there will be big regional variations.”

After three years of very little movement, Savills thinks the London market is ready for further growth. It is expecting the top end, known as the prime market, to do best, with prices rising by around 5%.

Knight Frank, another estate agent, is even more bullish about prime properties in London. It thinks they will go up by an average of 7%, with the most expensive — those worth £3m or more — rising by 8%.

High City bonuses and the continued buoyancy of the financial markets will help boost the housing market in the capital. And the shoots of recovery are expected to spread to the mainstream market as well. Savills expects prices in this sector to rise by around 3% next year.

A pick-up in London will be welcome news for sellers because it has been a buyers’ market in the capital for the past few years. However, vendors in other parts of the country look set for a harder year next year.

Savills thinks the weakness in London and the southeast over the past couple of years will spread north. It predicts falls in every region apart from London, the southeast and Scotland, and thinks that prices in northern England will fall by 5%.

Some places will buck the trend, however, so investors who buy carefully should be able to beat the market. Knight Frank believes that, despite the feeling that many areas in the north will struggle to achieve positive growth next year, some towns in the region have further to go.

It thinks Durham will see above-average growth because of demand from the increasingly prosperous northeastern business community. Bradford and Hull should outperform the market because of the regeneration in those areas. And Newark and Grantham look set to prosper as improved rail links with London let commuters look further north.

Knight Frank also believes that university towns are still a good bet for investors. The majority of students live in private rented accommodation and, with the number of people attending university increasing each year, demand should remain strong.

You can also get exposure to the residential housing market through covered warrants or by buying shares in housebuilders. Goldman Sachs offers a covered warrant linked to the Halifax house-price index.

Warrants give you the right to buy or sell an underlying asset at a specified price (the strike price) on a set date. Call warrants give you the right to buy; put warrants give you the right to sell.

So if you think house prices are going to rise, you may choose to buy call warrants to capitalise on future gains.

Alternatively, if you think the value of your home is going to fall, you could hedge against it. If the Halifax index falls, the rise in the value of the put warrant may offset the lower value of your property.

However, there is a risk that the value of your home may not rise or fall at the same rate as the Halifax index.

Other ways into residential property

• Buy covered warrants. Goldman Sachs (gs-warrants.co.uk) offers warrants linked to the Halifax Price Index.
• Buy shares in housebuilders. Stephen Whittaker at New Star likes Wilson Bowden and Barratt Developments.
• Graham Spooner at The Share Centre suggests construction companies that have housebuilding arms, such as Galliford Try.

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