House prices in UK ‘may stall, but won’t crash’
22/10/2007 - 08:01:11
The UK housing market is not heading for a major recession despite suffering a knock from the meltdown in credit markets, according to experts.
Ernst & Young’s latest Item Club forecast on the economy gives hope that a much-feared property market crash will be avoided.
The autumn report – due to be published today – predicts that while prices may stall next year, housing should remain resilient amid a strong labour market and lower outlook for interest rates.
But the influential Item Club economists believe the UK’s economy will slow dramatically next year due to the tightening in credit conditions, cutting the forecast for 2008 growth from 2.5% to 2.1%.
The Item Club report’s view on the housing market comes in stark contrast to an International Monetary Fund (IMF) warning last week that prices could be in line for a sharp correction.
The IMF said the UK was one of the countries most at risk of mirroring the property slump seen in America, with house prices now more overvalued than they were in the US before the slowdown hit there.
Mortgage groups have also been clamping down on lending for borrowers amid the global credit crunch, which caused the high profile funding crisis at Northern Rock.
This is thought to be having an effect on the numbers of homebuyers, with figures last week revealing lower mortgage lending in September, which in turn has led to fears of a housing crash.
However, the Item Club report said: “Item does not believe that the tighter lending conditions, caused by the worldwide squeeze on credit, will lead to a serious correction in house prices.”
The Northern Rock debacle has led to predictions that the Bank of England’s next move in interest rates will now be a cut, having previously expected rate hikes, which is helping bring down the price of new mortgages, according to the Item Club report.
Peter Spencer, chief economic adviser to the Item Club, added: “Activity is likely to fall and prices may stall through 2008. But as interest rates come down and new supply remains restricted, the foundations will be laid for renewed real price growth in the long run.”
He said that consumer spending may slow from 3% this year to 2% in 2008, although the report suggests the credit crunch will act as a “timely” opportunity to rebalance the economy.