LONDON, United Kingdom (Reuters):

A revival in the British housing market is set to cool off later this year and into the next, with rising interest rates and overvalued property preventing further big price rises, a Reuters poll showed on Thursday.

A poll last week of 29 economists and property analysts showed median forecasts for just six per cent house price inflation by year-end compared with nearly nine per cent by some measures at present. They predicted that would slow to 3.5 per cent in 2007.

Overvalued

Nearly 80 per cent of the analysts who answered the question - 17 of 22 - said the market was overvalued, up from two thirds three months ago.

The rest said house prices, which have more than doubled since the late 1990s, were fairly valued.

The survey comes just weeks after the Bank of England unexpectedly raised interest rates by a quarter point to 4.75 per cent, its first hike in two years.

Expectations are running high for another rise to five per cent in November.

But economists again reckoned the likelihood of a correction in house prices was low, with median forecasts at just under 14 per cent, below the one in five chance polled through most of 2004 around the time when house price inflation hit its peak.

"Interest rates have risen, are likely to rise a bit further, and most of that, if not all of that has been passed on by banks at a time when unemployment is rising and real income growth is being squeezed," said John Butler, economist at HSBC.

"That is a bad mix for the housing market and .... there is a bigger chance now that we get a correction in 2007 than there was the last time interest rates were rising," he said.

But many economists reckon that realigning the ratio of house prices to what people earn from over six currently to a historical average closer to 3.5 could mean years of stagnation, not outright price falls.

Such predictions for a soft landing, however, come against the backdrop of increasing worries that the once-booming U.S. housing market is not just slowing, but cooling fast.

First-time buyer strike

This year's unexpected British revival, which has been centred mostly on London and south east England, followed a quarter point interest rate cut a year ago.

That was a hotly-debated move that BoE Governor Mervyn King had opposed.

But now it is clear rates are on the opposite path.

"The key factor is mortgage rates, and the fact they have risen substantially will start to have an effect on the housing market in a pretty short period of time," said Gavin Redknap, U.K. economist at Standard Chartered. "But in the near-term there is still some momentum left."

Affordability is stretched and for first-time buyers is now at its worst since early 1992, according to Royal Institution of Chartered Surveyors research published this week.

But many economists also argue that a rising population - which official statistics showed on Thursday hit 60 million for the first time - and continued lack of supply means that the housing market will remain underpinned.

Buy-to-let borrowing hit a record in the first half of this year, up 20 per cent from the previous record, according to figures from the Council of Mortgage Lenders.

However, rising unemployment and the noticeable dearth of first-time buyers in the recent housing market turnover reported by mortgage lenders is a warning sign to those expecting prices to climb even higher.

"First-time buyers are the lifeblood of any sustained increase in the house price to earnings ratio," said Danny Gabay at Fathom Financial Consulting in London.

"Their distinct absence from this rally is one more reason to doubt its sustainability."