House price forecasts remain gloomy as credit crisis brightens

The Bank of England’s Financial Stability report, published today, is upbeat on the credit crisis suggesting that banks’ losses may be only around half of the $400 billion (£202 billion) estimated, and that confidence should now be returning to the money markets.

However, the report’s stance on the UK housing market is not so encouraging because it warns that house prices could fall further.

At the same time, David Blanchflower, a member of the Bank’s Monetary Policy Committee has been speaking publicly about a 30% decline in UK house prices over the next two or three years.

This would be in line with last month’s assessment by the International Monetary Fund, which found that UK house prices are 30% above the economic fundamentals (such as the average national wage) that support the market.

All the evidence available points to the slowdown in the housing market continuing into the second-quarter of this year and beyond.

Lending for new house purchases is at record lows and the Nationwide’s latest house price index shows that in March, property values dropped 1% year-on-year, marking the first decline in annual house price inflation in 12 years.

The latest trend among lenders is to demand deposits of up to 25% for their most attractive loans.

Mortgage costs have increased to the extent that the Bank of England has warned that the 1.8 million homeowners coming to the end of fixed-rate deals this year face a payment shock of up to £230 a month.

According to other calculation by the Bank 1.7 million homeowners could fall into negative equity if the slide in prices continues.

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