House market double dip warning

House market double dip warning Forecasters turn bearish over fears that job losses and coalition threat of new property taxes will undermine economic recovery Robert Watts Published: 26 September 2010 Comment (1) Recommend (0) Banks maintain that house prices are 'precariously high' and are set to drop (PA) Britain’s housing market is set for a double-dip slump, with prices expected to fall 7% by the end of next year, according to leading City forecasters. Despite growing evidence of an economic recovery, banks maintain that house prices are “precariously high” and are set to drop as mortgage rates rise and government cuts bite. The property market is also expected to weaken as income growth fails to keep pace with inflation and banks continue to rebuild their balance sheets. Morgan Stanley, the American investment bank, believes that house prices will fall by 7% by the end of 2011, but has said a slide of as much as 18% is possible. Melanie Baker, a UK economist at the bank, warned of a “near-term correction in house prices and significant volatility ahead for commercial and residential property”. “Affordability looks stretched and house prices look over-valued,” Baker said. “UK disposable income is likely to contract this year and rise relatively weakly next year. “We don’t think that a weak recovery in supply is enough to prevent a double dip in house prices.” Property prices grew strongly earlier this year, after plunging by 23% between August 2007 and April 2009, according to Halifax, Britain’s largest mortgage lender. However, Nationwide, another big lender, has already said that property prices have been falling for the past two months. Deutsche Bank believes that home values will fall by 5% next year. George Buckley, an economist at the bank, said house prices here fell much less than in America and remain “precariously high”. “The UK market looks affordable at present, but that’s only because mortgage rates are relatively low,” said Buckley. “When the Bank of England begins to raise interest rates, which might be as soon as next year, house prices could fall more sharply.” Economists also fear that job losses and budget cuts to be outlined in next month’s comprehensive spending review will further undermine property prices. A series of other policies planned by the coalition government, such as higher stamp duty on properties worth more than £1m and lower housing benefit, are also likely to depress the market. IHS Global Insight, another economic forecaster, predicts that house prices will fall by 6.3% next year. Capital Economics, the habitually bearish consultancy, expects prices to fall by 10% in 2011.

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