mortgage bank Bradford & Bingley has reinforced predictions of a slowdown in the housing market, warning of "significantly lower" price inflation next year.

The group, which has increasingly focused on the buy-to-let sector, said it was clear house prices had already softened in London and the South.

It said: "We believe that in 2003 average house prices will grow at a significantly lower rate than that experienced in 2002."

Analysts have long believed the housing boom will begin to cool next year and have warned of a sharp correction if prices continue to soar.

Housebuilder Berkeley has indicated it is becoming harder to sell single detached houses in the Home Counties and large apartments in London.

Chief executive Christopher Rodrigues said: "These are good things as there has been a degree of irrational exuberance and the rate of growth needs to slow. The customer is getting looking for value.

"Our best guess would be that house prices will grow in the low single-digits next year."

However, Bradford & Bingley said that, despite predictions of slower growth, low interest rates should underpin the housing and mortgage market going into next year.

It said that, with total lending balances rising to more than £20 billion since June, it was on course to beat profits expectations this year.

The bank bought a £650 million mortgage loan book from General Motors Acceptance Corporation in September as part of its expansion.

It said mortgage broking revenues were continuing to grow strongly across its bank and estate agency networks.

The bank will, however, suffer a £10 million exceptional charge this year after deciding to close a mortgage joint venture with US group Alltell. Bradford & Bingley said the current uncertainty caused by changing mortgage regulations in Europe meant further investment "was not justified".

The City believes Bradford & Bingley will generate profits of about £265 million and the bank said it was "comfortable" it would exceed this goal.