Vendors lower prices to secure capital gains

Analysts at investment bank, JPMorgan, are forecasting that UK House prices will decline by 6% in 2008, and continue falling next year.

At the end of 2007, the bank was predicting that prices would remain stagnant for at least a year, but last week, Malcolm Barr, JPMorgan’s chief UK economist, described the current situation as “pretty bleak”.

Mr Barr explains: “The rapid slowing in prices, the step-up in new supply, and the marked drop in household expectations for house prices suggests the credit crisis has encouraged existing homeowners who were considering a sale to move quickly, and accept a lower price, to realise existing capital gains before they are eroded.”

At the same time, mortgage approvals for new properties have fallen for seven consecutive months and lenders are demanding higher deposits to secure their best rates, removing many potential first-time buyers from the market.

Meanwhile, Citigroup analyst, Michael Saunders, is predicting that the credit squeeze will depress house prices and lead to a “marked slowdown” in consumer spending this year.

He believes the Bank of England should address this by reducing the base rate gradually to 4.25%.

However, the Bank’s Monetary Policy Committee is faced with the difficult task of balancing inflationary pressures with evidence of a slowing economy and the timing of the next base rate cut is difficult to predict.

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