UK house prices increased by 5.2% in 2007

House prices in 2007 Quarter 4 were 5.2% higher than in 2006 Quarter 4 with the average price of a home in the UK increasing by £9,821 over the year to £197,071, according to the Halifax House Price Index.

The annual increase of 5.2% made 2007 only the second year since 2001 when prices have risen by less than the long-term average of 8%.

Scotland records the biggest house price rises in 2007

House prices increased in all regions during 2007. Scotland recorded the biggest price rises with a 13.1% increase; the only double digit increase. House prices in Scotland rose more quickly than the UK average for the fifth successive year. A key factor driving the increase in house prices in Scotland has been its relative affordability. Scottish house prices continue to be the most affordable in the UK. At £144,897, the average price of a house in Scotland is 26% less than the UK average of £197,071.

Northern Ireland sees the second biggest price rise

The next highest rises were in Northern Ireland (9.3%) and the South East (7.0%). Although Northern Ireland experienced the second highest regional rise in 2007, the increase in prices was markedly below the spectacular 52.9% increase in 2006. This slowdown was due largely due to a significant worsening in affordability as a result of the rapid rise in house prices in Northern Ireland over the past few years. Northern Ireland was the most expensive region in the UK outside London and the South East at the end of 2007. Two years ago, only Scotland had a lower average price than Northern Ireland.

Scotland and North record stronger price gains than in 2006

Scotland and the North were the only regions to record higher house price increases in 2007 than in 2006. All other regions experienced a slowdown reflecting the overall softening in housing market conditions in 2007 as a result of higher interest rates and falling real earnings, which have put pressure on households' income.

Smallest regional rise in East Midlands

The smallest house price rises in 2007 were in East Midlands (0.6%), Yorkshire and the Humber (1.4%) and North West (3.2%).

Mixed regional picture in Quarter 4

For the UK as a whole, house prices in Quarter 4 were marginally lower than in Quarter 3, down -0.8%. Prices increased in four regions: Scotland (2.4%), West Midlands (2.1%), Wales (0.9%) and North West (0.6%). Prices fell in Quarter 4 in the other eight regions. The biggest falls were in Greater London (-6.3%), South East (-2.3%) and East Midlands (-2.3%). The decline in London is consistent with figures from RICS and some estate agents. RICS, for example, reported a second successive monthly fall in prices in the capital in December. Prices fell in the majority of London boroughs in Quarter 4. Those areas that saw the best performance tended to be boroughs further away from the centre of the capital and where prices are relatively low.

Price falls need to be viewed against strong gains in recent years

The price falls in Quarter 4 need to be seen in the context of the substantial rise in the past few years. Prices in the capital, for example, have risen by 193% over the past ten years.

Price rises expected in the south and Scotland in 2008

We predict that UK house prices will be flat in 2008. There are, however, likely to be regional variations. Modest price growth is expected across southern England and in Scotland during 2008.

but modest price falls predicted in northern England and the midlands

Worsening affordability and weakening economies are expected to cause a modest fall in prices in northern England and the midlands. Very rapid house price growth in these parts of England in the past five years has led to widespread difficulties in entering the housing market. These constraints, together with a sharper economic slowdown than in southern England in 2008, are likely to cause a modest softening in prices next year. These small falls, however, need to be viewed in the context of the substantial rises recorded in recent years. For example, prices in the North have risen by 187% over the past ten years and by 171% in West Midlands.

Commenting, Martin Ellis, chief economist, said: "The slowdown in house price growth seen in the first three quarters of 2007 continued in the final three months of the year with prices slightly lower than in the preceding quarter.

Sound economic fundamentals and lower interest rates will support house prices in 2008. The UK economy is expected to deliver its 65th successive quarter of GDP growth during the year, extending the longest running period of unbroken growth on record. The MPC is likely to follow up last month's cut by reducing the Bank Rate at least twice in 2008.

House prices for the UK as a whole are predicted to be flat during 2008, but there are likely to be regional variations. Small price rises are expected in the south and Scotland whilst modest falls are predicted in northern England and the midlands. These falls should, however, be viewed in the context of the substantial house price rises over the past few years. For example, prices in the North have risen by 187% over the past ten years and by 171% in West Midlands."