House prices set to fall for two years

| January 21, 2008 | 0 Comments

Capital Economics, the economic forecasting consultancy, has published its latest report on the future of house prices, in which it predicts that the housing market is set for a two year period of correction.

A 5% fall is forecast for 2008, increasing to 8% in 2009.

The report highlights the fact that affordability remains 34% worse than its 30-year average, although the possibility of an economic slowdown as a result of the credit squeeze could mean that interest rates will be lowered significantly over the next two years.

According to Capital Economics, the base rate could be cut to 4% in 2009, which would help ease affordability pressures but is unlikely to restore the housing market to price growth.

Homebuyers may not see the full benefit of lower interest rates because the credit squeeze has left lenders looking to their profit margins, and mortgage interest rates are therefore unlikely to fall in line with the base rate.

In addition, a lack of confidence in the housing market combined with tighter lending criteria could mean that interest rate cuts alone are unlikely to boost mortgage demand.

Given that the housing market is overvalued, the report concludes that these factors will mean that recent house price falls will continue into this year and next.

Turning to the buy-to-let market, which has been a key driver of house price inflation in recent years, Capital expects new buy-to-let investors to be deterred by the prospect of capital losses and low yields.

On a regional basis, the report predicts house price falls across all regions although the severity will vary.

The North, Northern Ireland, North West and East Midlands are areas where affordability and valuations are most stretched, and could therefore suffer the largest falls.

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