House prices could leap 11% in two years

Average property prices could return to their 2007 peak by the end of 2011.

Thanks to record low interest rates, real house price inflation could hit 4% this year and 7% next, taking the average property value to £186,000.

That is the view of investment house Henderson.

Henderson economist Simon Ward compared the potential rebound to stock market recoveries triggered by former Fed chief Alan Greenspan in a phenomenon known as the 'Greenspan Put'.

"I would argue we have seen the King Put being exercised," he said, referring to Bank of England governor Mervyn King.

The Bank voted unanimously to hold BankBase Rate at 0.5% and continue Quantitative Easing this month, minutes showed yesterday.

Henderson’s research analyses historical data, and surmises that, as long as interest rates remain low, property prices may well rebound – even if they look relatively high in historic terms.

Ward points out that the cut in Bank rate from 5.0% in September 2008 to 0.5% in March 2009 led to a steep drop in mortgage interest bills, reducing delinquencies and forced selling.

Household interest payments fell from 10.5% of disposable income in the third quarter of 2008 to 6.9% a year later.

He concludes that increased affordability could lead to higher prices.

But officials warned a sustained spell of rising prices could push up inflation expectations, pointing to a risk of rate hikes.