House prices are going to drop even further in 2009, marking a peak to trough decline of at least 25 per cent.

According to the latest forecast from the Royal Institution of Chartered Surveyors (RICS), house prices will fall another 10 per cent over the next 12 months, which will mean the average house will be worth between 25 and 30 per cent less than at their peak in summer 2007.

RICS says that lenders’ ongoing caution when it comes to mortgage lending will be the main contributor to the continuing fall in house prices, but says that because transaction activity is now ‘bumping along the bottom’, house sales should start to climb again in the coming year – by around 10 per cent.

“Lenders are likely to remain cautious in the near term in the absence of any ‘guarantees’ on mortgage backed securities. This, coupled with an increasingly gloomy economic picture, suggests that house prices will continue to decline in 2009, explained RICS chief economist Simon Rubinsohn.

“However, transaction levels do seem to have hit a floor with some signs that opportunistic investors are returning to the market,” he said, “we expect a modest rise in sales over the course of the next year from the very low levels seen in recent months.”

The forecast predicts that house building will continue to shrink, with new housing starts for 2008 “unlikely to be much above 110,000” which is a figure far lower than recorded during the recession of the 1990s.

“Output is set to plunge to a new low in 2009 with new starts expected to fall comfortably under the 80,000 mark,” said RICS, “which is well below the Government’s target for building two million new homes by 2016 and highlights the risk of yet more house price volatility in the medium term”.

Mr Rubinsohn warns that this massive reduction in the number of new homes now being built is a “major concern”.

“It is likely that there will be even fewer new starts in 2009 leading to a very real risk that a serious housing shortage will fuel another bout of volatility once the current crisis eases. Crucially, the policies are not yet in place to create a vibrant but sustainable housing market in the future,” he said.

© Fair Investment Company Ltd