There is more likely to be a gradual slowdown in the housing market than a steep fall in property prices, the Council of Mortgages Lenders (CML) said today.

But the group warned that this outcome was "less than certain", with the unsustainable rate at which property prices have grown during 2002 increasing the danger of a sharp correction.

It expects prices to continue rising next year, though only by around 7 per cent, well down on this year's 23 per cent jump.

House price inflation is then set to slow down further in 2004 when the group expects increases of around 4.6 per cent.

The CML also expects mortgage lending to carry on increasing, rising to £225 billion from £215 billion this year, driven by continuing strong levels of remortgaging, which is expected to account for more than a third of all lending.

But it warned the market could suffer a sharper correction if the global downturn is more protracted than expected, leading to increases in unemployment.

However, even if this did happen, it did not expect any correction to be as severe as the one seen in the early 1990s, which plunged thousands of home owners into negative equity, as interest rates are unlikely to reach the double digit levels they did then.

CML director general Michael Coogan said: "We do not expect house prices generally to fall, but we do believe house price inflation will slow down markedly as affordability constraints kick in and interest rates rise modestly later in the year.

"While we do not expect too many problems in the housing market, now is not the time to borrow on the assumption that house prices will continue rising at their current rate forever."

John Butler, an economist at HSBC, said: "The UK housing market remains buoyant at a time when global uncertainties have increased.

"We believe house prices and consumer spending will slow next year, but the threat of a crash has increased."

He added that a crash needed a trigger, such as a rise in rates or rapidly rising unemployment.