Money News
Economic think tank, Capital Economics, says that a stabilisation of house prices in 2008 is no longer its central scenario. Rather, because of the weaker economic outlook, poor affordability, tighter lending criteria and rising defaults, it now expects house prices to fall by 3% next year. It also anticipates a further 3% fall in 2009. London house prices, however, should hold up, but most regions will experience declines.
Admitting that whilst affordability was also strained in 2004/05 when the economy slowed, but that house prices didn't fall, Capital says that key factors have changed materially since then.
For a start, houses now are even less affordable for new buyers entering the market. And the Northern Rock debacle is also sure to have put a dent in the hitherto high level of confidence in the housing market.
Capital says it also fears that the risk of a US-style sub-prime crisis is being underestimated. What's more, lingering inflation concerns will prevent any repo rate cuts until next year. And even if the repo rate is cut sooner and/or more extensively, the availability of mortgage credit will be reduced as UK lenders adopt a more cautious approach.
With finance more difficult to obtain, Capital expects housing market activity levels to fall by more than 15% in 2008 and to remain subdued in 2009.
Meanwhile, financial turmoil has weakened the outlook for London; but a stagnation of house prices in the capital seems most likely in the short term. Housing affordability is worst in parts of northern England, the Midlands, Wales and the South West. Hence, these regions will also be hardest hit by softer household and public spending. Thus, by and large, they are forecast to suffer the largest house price falls.
As for the buy-to-let market, typical returns are likely to be negative in 2008 and 2009 as net yields remain below mortgage rates and as capital gains - the key support for investment demand in the past few years - turn into losses. This will dampen new investment, although Capital doesn't expect a collapse in the sector.
30 October 2007 © Moneyextra.com
Moneyextra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.