House price forecast revised to two-year fall

Capital Economics, the economic forecasting consultancy, is predicting a 3% fall in UK house prices during 2008.

The consultancy had previously predicted a stabilisation in prices during next year, but now considers that a weaker economic outlook, poor affordability, tighter lending criteria and rising mortgage arrears and repossessions will lead to a fall.

It expects the decline to affect all regions of the country outside London, where prices should be maintained.

A similar reduction in house prices is also forecast for 2009.

Making a comparison with 2004/05, when house prices did not fall, despite a slowing of the economy and tight affordability, Capital points out that key factors have since changed.

For first-time buyers, houses are less affordable than in 2004/05 and the Northern Rock crisis has raised issues of confidence in the housing market.

In addition, the consultancy believes that the risk of a UK sub-prime crisis has been underestimated.

Capital expects a 15% decline in housing market activity levels during 2008 and for the market to remain subdued in 2009.

Northern England, the Midlands, Wales and the South West are areas worst affected by housing affordability issues and consequently the regions where the largest house price falls are expected.

The buy-to-let market is likely to see negative returns in 2008/09, with net yields remaining below mortgage rates.

The capital gain on properties will also be negatively affected, slowing new investment. However, no collapse of the sector is envisaged.

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