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House prices 'will begin to increase at end of 2011'

UK house prices are set to be 16% higher by the end of 2015 following a four-year recovery in the market that will start late this year, an economics group has predicted.

Property values will continue to fall for much of 2011, ending the year around 1.4% lower than they started it, according to the Centre for Economics and Business Research (CEBR).

But the market will begin to stabilise towards the end of the year, when the UK's property shortage will once again underpin prices.

Improvements to the major banks' balance sheets should lead to them loosening their strict lending criteria, enabling more people to buy a home.

The previous upturn in the housing market was caused by a mismatch between supply and demand, but the recovery petered out as economic uncertainty caused potential buyers to sit on their hands, while those who wanted to press ahead with a purchase continued to face problems raising the mortgage finance they needed.

But CEBR said with just 130,000 new homes built in 2010, around half the level needed to keep pace with the growing number of households, prices should increase by 16% between 2011 and 2015, the equivalent of a gain of around 4% a year.

The recovery will be more marked in London with demand from international buyers set to push up the cost of housing in the capital by around 2% a year more than across the UK as a whole.

CEBR chief executive Douglas McWilliams said: "We still believe house prices will fall this year, although there are signs that prices will stabilise over the second half of the year.

"The main factor driving house prices up is the shortage of available housing which has already pushed up rents. Housing completions fell to only 130,000 in 2010, well below the level required to keep pace with demographic change."

But consumer spending is likely to take longer to recover, with the group expecting it to fall by 0.8% in 2011, followed by relatively low average growth of 2% from 2012 to 2015.

The volume of food sales looks set to drop for the second consecutive year, falling by 0.1%, while clothing sales will increase by just 3.3%, one of the slowest growth rates in recent history.

The predictions come the day after property intelligence group Hometrack said house prices in England and Wales fell by 0.1% in May following a drop in the number of house hunters registering with estate agents.

The group expects the industry to lose 1% of its value during 2011 as a whole.