House prices to crash 40% unless mortgage lending improves

02 February 2009 / by Rachael Stiles
House prices could plunge a further 25 per cent in 2009 - a peak-to-trough fall of 40 per cent - unless the Government acts to improve mortgage lending.

According to research from the Centre for Economics and Business Research (cebr), the Government must succeed in its attempts to boost mortgage lending otherwise house prices will fall 40 per cent from their 2007 peak.

But, says the cebr, regardless of the Government's success in getting banks lending again, house prices have been hit so badly that they will be the same in 2013 as they were back in 2003.

The average house price could be as low as £139,000 in five years' time, says the cebr, which is just £1,000 more than at the end of 2003.

Those homeowners who want to move are already struggling; if they are lucky enough to find a buyer in the current climate, then they are often finding themselves in negative equity.

Ben Read, managing economist at cebr said: "The housing market has been at the centre of the credit crunch story, which as we all know has unfolded into the biggest economic crisis for a generation.

"We now stand at a point where direct government intervention to increase the level of mortgage availability – such as new issuance of mortgage-backed securities – will certainly stimulate housing market activity and stem falling prices.

"Whether this would be enough to shore up consumer confidence and plant the first seeds of a broader recovery is open to question, however it is clear that no action at all will mean another year of disaster for house prices and the wider housing sector."

While some forecasts have predicted that house prices will start to rise again by the end of this year, the cebr's research suggests that the property market crash has a way to go before it plays itself out.

"If lending remains close to current very low levels, the spectre of the biggest annual drop in UK GDP since post-war demobilisation in 2009, with concomitant rises in unemployment and collapsing confidence, will likely lead to an acceleration in house price falls." said Benjamin Williamson, one of the report's authors and economist at cebr.

But the cebr's predictions are based on a worst case scenario, whereby mortgage lenders have continued to refuse competitive mortgages to anyone without a significant deposit.

The effects of the Government's latest bail-out for the banks have yet to be seen, and the Bank of England – which has already cut rates from five per cent in September to 1.5 per cent in January – is widely expected to cut them for a fifth consecutive month to just one per cent this week.

Some mortgage lenders have been honouring the falling base rate and cutting their own rates in line with it, but the Government is urging them to do more to improve lending conditions and make it easier for first time buyers to get on the property ladder.

If more lenders start falling in line and market conditions improve, then the cebr's best-case scenario is less bleak, predicting that house prices could level out at £164,000 in 2009, and then increase slightly in 2010, but they will still not recover to their 2007 peak until 2013.

"The glimmer of light at the end of the tunnel for the beleaguered housing market is that prices and interest rates are now at levels whereby any improvement in lending is likely to lead to substantially increased activity and at the very least a bottoming out in house prices," said Mr Williamson.

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