The North-South divide in house price inflation will continue to narrow next year, the Nationwide predicted yesterday.

Although some convergence did occur during the second half of this year as the market slowed, the effect is expected to become more pronounced next year.

Monthly price growth has already slowed across most regions and the continuation of slow growth into next year will mean all regions experiencing a sharp reduction in annual price inflation.

The sharpest deceleration will be seen in the North, North-West, Yorkshire and Humberside and Wales, the building society forecasts.

Those are the regions that saw prices rising fastest this year, but are also where affordability has become most stretched when compared with the position in the late 1980s.

Also this year, employment growth was strongest in the northern regions, and this partly explained the North-South differential in house price growth, but this is unlikely to be the case next year.

Prices are expected to rise fastest in Northern Ireland and slowest in the North-West.

Nationwide also predicted that interest rates would rise again next year to more than five per cent.

The building society said it believed the Bank of England would be forced to act by inflationary pressure feeding through to the high street from a combination of rising producer prices, a lower exchange rate and increasing wage pressure, which may yet result from the tight jobs market.

But any rises in interest rates were unlikely to come into effect much before spring or summer, it said, in its housing market forecast for next year.