House prices could temporarily dip next year, as the supply of homes for sale increases and cash-rich buyers, who have dominated the market and driven this year’s recovery, pause for breath.

Savills, the estate agency, is forecasting an average decline of 6.6 per cent by mid-summer.

The falls will be larger in the North than in the South, accentuating the divide that has opened up between upbeat London and the Home Counties and the gloom in parts of the North and the Midlands.

But, by 2011, as the economic outlook becomes slightly clearer, values should be appreciating once more, although improvement will take longer to arrive in the North.

Savills estimates that prices could rise by as much as 27 per cent between 2012 and 2015, propelled by the continuing shortage of homes.

The average house would be worth £197,917, some 7.5 per cent above its peak in the boom moment of mid-2007.

The election will be “the catalyst” that suppresses the market’s mood in the new year, according to Yolande Barnes, head of residential research for Savills.

Homebuyers will be constrained by the prospect of higher taxes and by the impact of unemployment and public sector cuts, which will have a particularly adverse effect in the North.

These concerns will also beset the City of London-based recipients of bank and broking bonuses, despite the belief that this money would provide a further large boost to prices in London, the South East and prime rural areas.

Savills expects that, although some bonuses may be deferred, £1.2 billion could be invested in homes and in properties to be let out.

However, this is modest when compared with the £5.5 billion of the 2007 bonanza payout that was spent on properties.

Although the National Association of Estate Agents (NAEA) has reported that five buyers are registering for every one home available, there are already signs that the pace of activity is slowing in London and the South East.

In locations, such as Chiswick, Fulham and Wandsworth, prices are already at, or near their 2007-level. Octagon, the upmarket housebuilder, which operates in Richmond, Weybridge and similarly salubrious areas, said that there had been a stampede for its properties; the sale of a £5.6 million home in Radlett, Hertfordshire had set a record for the town.

Pent-up demand from buyers with cash or equity, the types who can easily obtain mortgages, caused the market to revive earlier and faster than Savills, or any other commentator, expected at the beginning of the year.

According to Ms Barnes, the pick-up began in March, when bankers who had been saving their previous bonuses as a hedge against harsh times, grew dissatisfied with the negligible rates of return on cash deposits, and began buying in their favoured habitats such as Chelsea and Fulham.

Rupert Sebag-Montefiore, chairman of Savills’ residential division, said there had even been some danger of the market in the capital overheating such was the fevered competition for the few properties for sale.

Lindsay Cuthill, head of Savills SW London, described the tempo in his territory as now more “lively” than “frantic”.

For the moment, many of the bankers who had been inquiring a month ago about homes for their 2009 bonus cash have yet to turn into firm buyers.

Q&A

Should I sell my house and rent now?

You might be tempted: this year started with buyers calling the shots as desperate sellers slashed prices but now agents say it is a sellers’ market. Buyers are jostling to secure the few homes for sale and prices are leaping. Step out of the market now and you may miss the first stages of the next rally, or find yourself unable even to find a family home to buy.

But how can prices be rising in a recession?

It is all about the lack of homes for sale. Sellers have been held back by demands for huge deposits, unemployment and the cost of moving. As a result, Savills says, there were as few as 40,000 sales a month in the downturn, 75 per cent lower than in the boom. Buyers have been forced to bid hard. This is how Halifax could report that prices were up 1.2 per cent last month and are now 7.1 per cent higher than in April.

Why aren’t there more homes available to put on the market?

It’s been a dire year for ordinary borrowers after a mortgage — but spare a thought for developers. Many are struggling to find backers, which means we can expect a shortfall in new homes. Savills thinks we are 287,000 short already, but that the number will be as high as one million by 2016.

Surely, lenders must be offering more mortgages?

This chronic shortfall is ultimately expected to support prices, so lenders can’t really say that they can’t lend because they fear house values plunging. There is some evidence of more loans being offered at higher loan-to-value ratios or to first-time buyers. But banks must rebuild their balance sheets — meaning that only the most solvent borrowers can hope to get a competitive rate.

Will that change next year?

There is little hope of a rapid improvement in mortgage availablity. In fact, Yolande Barnes, head of residential research at Savills, says: “We could be looking at a credit crunch that stretches out for five years.”

So, it’s a good time to invest in a buy-to-let?

Demand for rental homes is strong and, unusually, rents are rising at the same time as house prices. But unless you have cash in a savings account, you’ll need a mortgage — and most lenders remain unenthusiastic about buy-to-let investors. (Judith Heywood)