ITEM warns of house price freeze

Ernst & Young ITEM Club, the leading forecasting group, has issued its latest quarterly report which contains a strong warning about overvaluation in the UK housing market.

It believes that by the end of 2008 the effects of higher interest rates will slow house price inflation from the current level of 10%, to less than 1%.

ITEM expects the base rate to increase to 6% in 2007/8 and once this level is reached, it expects the boom in the property market to end.

The forecasting body is predicting that interest rates are likely to remain at or around 6% until 2012.

Given that it sees current UK house prices as being overvalued by as much as 16%, the group warns that property prices could stagnate over the coming decade.

If ITEM’s interest rate predictions are correct, first-time buyers will be particularly badly affected as they are already struggling to get a foothold on the property ladder with the base rate at 5.75%.

For someone with a £150,000 repayment mortgage on a 25-year term, a rise to 6% would mean an additional £300 a year in mortgage costs, taking annual repayments to £13,896.

The ITEM Club has a good track record in economic forecasting, having correctly predicted the 1998 property boom.

The latest report is the first occasion on which is has raised concerns about the UK’s buoyant housing market.

Whilst fears of a crash have been mooted by a number of experts in the field, the ITEM report claims that the market will freeze.

It predicts that by the end of 2007, annual house price inflation will slow to 7% and then steadily drop to below 1% by the end of 2008.

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