Mortgage lenders, brokers, estate agents and valuers agree that property prices will slow dramatically in 2008 – and, in some regions, fall. But none is predicting a crash in the residential or buy-to-let markets.

Halifax and Nationwide expect prices to remain flat next year. Halifax recorded a 1.1 per cent fall in November. Martin Ellis, chief economist, says this shows that higher interest rates, higher mortgage repayments and falling earnings are putting pressure on household income.

Nationwide has noted how rapidly “momentum is now fading” in the residential property market. It forecasts that house price inflation will drop from its current rate of 9.7 per cent to 0 per cent by this time next year.

“The main reasons for this more subdued outlook lie on the demand side of the market, where a slowing economy, tighter credit conditions, stretched affordability for first-time buyers and lower house price expectations appear likely to reduce the level of activity,” explains chief economist, Fionnuala Earley.

Lenders and estate agents expect the ongoing effect of the credit crunch to result in tighter mortgage lending conditions and fewer transactions.

“The biggest determinant of the market’s health will be how far the credit crunch drives unemployment,” says Matthew Bullock, chief executive of Norwich & Peterborough Building Society. “If this is contained around the financial services sector, then the market should be only modestly lower in volume. If consumer spending is badly damaged, the market could be off by 20 per cent or more.”

Spicerhaart, which incorporates estate agents Haart, Spicer McColl, Felicity J. Lord and Darlows, believes the credit crunch will continue. “This will produce a subdued environment characterised by low average price growth of around 2 per cent,” says Steve Cox, operations director.

Asking prices for properties will then become a factor, with sellers needing to be more realistic. “Buyers will be a lot more price sensitive than previously,” adds Cox. “Sellers who hope to achieve an extra 5 per cent on the price of their property will be disappointed.”

Ray Boulger, senior technical manager at John Charcol, the broker, says that sellers’ expectations are likely to slow the market down. “Although buyers are much thinner on the ground, so are sellers, as many who don’t need to move are not prepared to sell at less than they think their property was worth earlier in the year.”

As a result, the first half of 2008 could see a fall-off in activity. An oversupply of new-build flats in some cities could also slow this market.

In this environment, regional variations are expected to widen, according to the HBOS Economic Forecast. Limited price growth is expected in southern England and Scotland in 2008, but worsening affordability and weakening economies will lead to a fall in prices in northern England and the Midlands.

HBOS estimates that the North, Yorkshire and Humberside, and the North West will be hit hardest, with prices falling 2 per cent on average.

Most lenders and advisers think it unlikely that prices could fall any further, because of the economics of the UK market. “Sound market fundamentals, including high levels of employment and a shortage in the number of properties available for sale, will continue to support house prices,” says Ellis.

This year’s introduction of Home Information Packs (Hips) may, however, act as a further damper.

Nationwide believes the introduction of the final phase of Hips could reduce the available housing supply in the short term.

Boulger is more damning. He says housing transactions have fallen by at least 25 per cent since the summer. “The introduction of Hips has definitely distorted the market in the second half of the year and may be partly responsible for the slowdown, with sellers seeing them as a pointless additional cost and most buyers ignoring them,” he says.

This shortage of supply will remain a feature of 2008. HBOS calculates that the government’s target of building 3m new homes by 2020 is more than 500,000 short of what will be required. This reduced supply could stop prices falling too far.

Stuart Law of property investment advisers Assetz even sees supply constraints as underpinning the buy-to-let market.

He says immigration is continuing unabated, sellers are retreating faster than buyers, government policy on the number of new homes being built shows little sign of being implemented and the “mothballing” of schemes by developers in city centres is likely to reduce supply rather than increase it.

Buy-to-let prices and rental yields will ultimately depend on the availability of cheap mortgage deals. “The credit crunch is likely to lead buy-to-let lenders to tighten their rental cover and loan to value criteria, making it more difficult for new investors to enter the sector,” says Earley of Nationwide.

Some even believe buy-to-let properties could outperform the wider market, if interest rates fall. Law, whose firm promotes buy-to-let investment, remains bullish. “With interest rates predicted to fall imminently, and rents rising, both new and established investors will soon reap the rewards of higher rental yields with positive cash flow,” he says.