Interest rates are likely to fall by three quarters of one percent in 2008 with property price inflation remaining positive, according to forecasts from the Council of Mortgage Lenders.

Gross lending will decline but is still set to exceed 2005 levels and transaction levels will remain above one million.

The credit crunch has exacerbated trends that were already emerging in terms of a slow down in the house purchase market. However, the trend is anticipated to be worse than previously expected because of funding constraints and tightening of lending criteria resulting in reduced opportunities for remortgaging across the lending spectrum but particularly in lower income households.

The Council of Mortgage Lenders is forecasting that base interest rates will end at 5.5% in 2007 and 5.0% in 2008.

CML director general Michael Coogan commented: ?The housing and mortgage markets are facing their most challenging period since Labour came to power a decade ago. Luckily, the credit crunch occurred at a time when the UK economy was robust, but even so the effects on the financial sector are significant, and the mortgage market is not immune from them.

?We now expect a slower mortgage market next year, although by no means a stagnant one. Most borrowers will cope, but not everyone will escape unharmed from the effects of a slower market, so the government should make it a policy priority to overhaul the system of state support for home-owners, which has lagged pitifully behind the times.?

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