House Prices: Will your home reach for the sky or crash?

Fireworks? Or a damp squib? The outlook for house prices in 2007 has already divided market specialists.

At the start of last year, there were many predictions of a lacklustre year for price growth - mostly proved wrong.

The Halifax House Price Index shows that the price of the average UK home rose by 9.9 per cent over the course of 2006, against the 3 per cent it predicted at the start of the year.

"The economy was stronger than we expected," says the bank's chief economist, Martin Ellis. "Unemployment was very low and there was an acute shortage of housing supply."

Nationwide building society's index recorded national price rises of 10.5 per cent, against its prediction of between 0 and 3 per cent. Chief economist Fionnuala Earley agrees that the strength of the economy and problems with supply had been underestimated: "Criteria for buy-to-let lending have become more relaxed, and more property investors have been competing for the same housing stock [to] push up prices."

Most predictions for 2007 point to further growth, though with restraints, largely due to anticipation of two quarter-point rises in interest rates - the first of which came last week (see News, page 23). A slowing economy could also take the heat out of the market. The Council of Mortgage Lenders expects a 6 per cent rise; the Halifax goes for 4 per cent; and Nationwide has plumped for 5 to 8 per cent.

The homeowning public are also optimistic. In a survey by the organisers of the Homebuyer Show - due to take place in London in March - 90 per cent of respondents said they expected prices to rise this year, with just 2 per cent believing they will fall. One third foresaw rises of more than 5 per cent.

However, although the Halifax index made upbeat reading for 2006 as a whole, it showed a 1 per cent fall in national average prices last month. This was possibly the first effect of the two quarter-point hikes in rates in August and November.

While Mr Ellis says it is too early to conclude that this indicates a genuine slowdown in the market, other industry commentators warn that we could be in for a crash.

Jonathan Davis, director of chartered financial planners Armstrong Davis, says: "We should already be in a state of negative equity but, as the market was slowing in 2005, the Bank of England made an inappropriate decision to cut rates by 0.25 per cent [to 4.5 per cent]."

This persuaded thousands more property owners into the "madness" of trading up, getting into buy-to-let or cashing in on the equity, he continues. "Now the base rate is rising quicker than it would have been and figures already show significant rises in bankruptcies."

More optimistic observers, though, point out that climbing prices have made remortgaging a more attractive proposition. Rob Clifford of broker Mortgageforce argues: "When you are talking about using mortgage rates of around 5 per cent to pay off unsecured borrowing [such as credit card debt] at 18 per cent, releasing equity makes unquestionable financial sense."

It's worth remembering that headline price increases do not apply to everyone. For example, property in the north of England rose by only 3.1 per cent during 2006, according to the Halifax, while in Northern Ireland prices were up by 53 per cent.

For many first-timer buyers - making up just 27 per cent of all property purchasers - 2007 looks a daunting prospect.

Jenny Rowley, 26, who is renting a flat in east London, wants to buy but describes the idea as "wildly out of my league".

She says: "I will probably buy somewhere in a cheaper area of the country and rent it out.

"I'm not expecting house prices to fall. Even if they dipped slightly, it wouldn't make much difference to my affordability - especially in London."