House prices in the fourth quarter of 2007 were 5.2% higher than in 2006, increasing in all regions, but for the first time since 2001 prices rose by less than the long-term average of 8% - suggesting that house prices will be flat in 2008.

The average price of a home in the UK increased by £9,821 over the year to £197,071, according to the Halifax House Price Index. For the fifth consecutive year, Scotland recorded the biggest price rises, with a 13.1% increase; the only double digit increase.

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.

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 was well 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. Yet just two years ago, only Scotland had a lower average price than Northern Ireland.

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.

The smallest house price rises in 2007 were in the East Midlands (0.6%), Yorkshire and the Humber (1.4%) and North West (3.2%).
For the UK as a whole, house prices in Quarter 4 were actually slightly lower than in Quarter 3, down by 0.8%. Prices increased in Scotland (2.4%), West Midlands (2.1%), Wales (0.9%) and North West (0.6%).

But experts say that 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.

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Halifax predicts 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 worsening affordability and weakening economies are expected to cause a 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.

"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,” said Martin Ellis, chief economist at Halifax.

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 reduce the Bank Rate at least twice in 2008.