House prices will fall by 3.1% next year the Office of Budget Responsibility forecasts after previously predicting a 1.6% increase.
It then expects house prices to rise by 1.1% in 2012, 3.7% in 2013 and 4.3% in both 2014 and 2015 but the independent body has downgraded forecasts for each of the next five years.
In its report ahead of the chancellor of the exchequer’s autumn economic statement to parliament the OBR also predicted inflation would rise by 0.4% next year.
The Consumer Price Index would then rise again by 0.1% in 2012 before remaining stable for the next three years.
The Gross Domestic Product forecast for 2010 was upgraded from 1.2% to 1.8% after better than expected of 0.8% in Q2 and 1.2% in Q3, mainly due to the construction sector.
But the independent body lowered expectations for 2011 to 2.1% from 2.3% and 2012 to 2.6% from 2.8%.
It also forecasts a dramatic drop in the number of public sector job losses, down from 490,000 to just 330,000.
It says the government’s focus on reducing welfare costs has led to a change in forecast.
It also says unemployment will peak at 8% next year before dropping back to 6.1% in 2015.
The number claiming Jobseeker’s Allowance will fall to 1.1 million in 2015 from 1.49 million next year.
David Newnes, managing director of the LSL Estate Agency, says: “These encouraging growth forecasts will be great news, but little surprise for many households for whom low mortgage rates are creating high levels of disposable income.
“This has led demand in the property market to remain relatively resolute, with prices contained not by a sense of austerity among buyers, but by continuing caution from lenders.
“The ratio of buyers to sellers has fallen for most of 2010, but this is largely a result of more properties coming onto the market as the number of registered buyers has held up well.
“But the optimism of those paying mortgages will not tempt lenders out of their tough criteria – there are plenty of good reasons for their caution.
“Buyers will have to face a series of hurdles during 2011 that are likely to make life for many UK households tough.”