House prices are likely to remain flat or fall slightly over 2011, as low mortgage rates offset the drag of a sluggish economy, according to the trade body representing home lenders.

The Council of Mortgage Lenders, outlining its central forecast for next year, said the UK was likely to escape a “double dip” recession but that output growth was likely to be no more than about 2 per cent. A difficult jobs market and slower consumer spending were likely to slow demand, the CML said.

The Bank of England was, therefore, unlikely to make any significant change to interest rates and these could remain at the current 0.5 per cent rate for all of 2011.

Because low interest rates are likely to make it easier for borrowers to afford their mortgages, the CML is forecasting only a modest rise in the number in arrears with payments, despite a weak economy. The number falling behind by 2.5 per cent or more of outstanding balances – considered a serious arrears – is expected to rise to 180,000 borrowers: 1.58 per cent of all borrowers from 1.54 per cent in 2010.

The number of repossessions is expected to rise slightly in 2011, but remain below the recent peak year of 2009 when 47,700 homes were taken back from borrowers.

The CML’s outlook is consistent with that of many private sector forecasts, with closely watched indices compiled by lenders showing that the improvement seen in house prices earlier this year has ebbed away.

However, there were several factors beyond a weak economy that would constrain lending, the CML warned. In particular, banks needed to begin repaying funding advanced through various government support schemes that were put in place during the height of the financial crisis. “This is likely to limit the availability of credit to support mortgage lending next year, and beyond,” said the CML.

The trade body has pressed the Bank and the Treasury to extend the programmes, but has been rebuffed. However, the CML noted financing was less dire for its members than it had been earlier in the year.

“But despite a relatively favourable autumn for wholesale funding, the ability of lenders to continue to raise funds through securitisation and the issuing of bonds remains uncertain,” the CML said.

It expected remortgaging activity to remain subdued, further trimming lenders’ profits. Borrowers on attractively priced standard variable rates have little incentive to switch loans and those who want a better rate often have too little equity in their properties to be able to move.

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