House prices are set to rise by just four per cent in 2007, their slowest growth for 12 years, Britain’s biggest mortgage lender predicted today.

Halifax said that slower economic growth and higher interest rates would hit demand and bring house-price growth down from its current level of 9.6 per cent.

It expects the Bank of England to lift interest rates by another quarter point to 5.25 per cent in February, although they could come back down to 5 per cent by the end of the year as the economy slows.

Martin Ellis, chief economist, said: "Higher interest rates, greater pressure on household finances and subdued real earnings growth will constrain housing demand and growth is set to ease as a result."

Northern Ireland will enjoy the strongest housing market in 2007, with prices predicted to rise 15 per cent, although this is less than half the estimated gain of 34 per cent this year.

Towns such as Armagh, Carrickfergus and Newtownabbey are expected to lead the charge because average prices are currently lower than in the rest of Northern Ireland

London is predicted to come second in the growth stakes with a rise of 8 per cent, thanks to what is expected to be another record round of City bonuses.

Parts of East London, including Hackney, are likely to be among the top performing boroughs because of the ‘Olympic effect’ – the impact of regeneration ahead of the 2012 games.

Chatham and other Medway towns in Kent will also benefit from the planned opening of high-speed commuter services in autumn.

At the other end of the scale, prices in the north, the north west and Yorkshire & Humberside are predicted to increase by only 2 per cent as first-time buyers struggle to get on the housing ladder following recent sharp rises.

Halifax said there will be no towns with an average price below £100,000 by the end of the 2007, which will put more pressure on beleaguered first-timers. Mortgage payments already account for 22 per cent of gross income for a new borrower, above the long-term average of 19 per cent although still below the peak of 37 per cent in 1990.

Analysts point out that Halifax has been caught out before, though. It predicted house-prices inflation of five per cent this year, but the housing market has surprised almost everyone with a mini boom in which average prices have jumped nearly 10 per cent.

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