The RICS expects interest rates to rise gradually during 2004, and this will have a dampenig effect on the residential market. However strong regional variations are likely to continue, with 5% price rises expected in London and other southern markets, and northern regions continuing to rise by over 10 percent. But this rate is significantly less than in 2003: The Halifax, the UK's biggest mortgage lender calculates that some pasts of Yorkshire saw 33% price rises in 2003.

But overall a lack of availability of properties coming onto the market will exert upward pressure on prices in the first half of 2004. And regardless of the rising cost of borrowing demand for houses is likely to remain high due to the buoyant economy.

However, the RICS does sound a warning note over the long-term sustainability of current residential values. It notes that the ratio of house prices to incomes reached 6:1 in Q3 of 2003, the highest level ever recorded. The two previous peaks in the early 1970s and late 1980s housing market booms proved unsustainable, resulting in house prices falling in real terms by 30-35% until the affordability ratio fell back to its long term average.