UK house prices to fall 5% ’08, many see bigger drop

British house prices are likely to fall 5 percent this year, a Reuters poll of economists showed, and many believe they could tumble twice that as soaring consumer inflation restricts the scope for interest rate cuts. Forecasts for 2008 house prices on an annual basis ranged from a 10 percent fall to a 2.9 percent rise, with a median forecast of a 5.0 percent drop, according to the poll of 30 analysts at banks, investment firms and research institutes.
Nearly a third of the respondents — nine of the thirty — predicted a 10 percent drop in the poll, which was taken May 8-14. The median compares with that of a 0.8 percent fall in a Reuters survey in March, highlighting the deteriorating outlook.
The government has a similar view. Briefing notes for housing minister Caroline Flint, seen as she left a Downing Street meeting on Tuesday, said house prices could fall as much as 5 to 10 percent this year and that the government does not know how bad it will get.
The housing market, a bedrock of consumer wealth which has tripled in value over the last decade, has been slowing rapidly in the face of a global credit crunch and despite cuts in official interest rates.
"The fundamentals are so weak that it would require a prolonged period of base rate cuts to re-stoke house price inflation," said Andrew Goodwin at Experian.
Analysts in the poll also predicted that monthly mortgage approvals will drop to 63,000 in six months, before recovering to 73,000 in 12 months. This compares with a record low level of 64,000 approvals in March and a 2007 average of around 104,000.
Approvals — loans agreed but not yet made — are a good early indicator of where house prices are heading.
Forecasters gave a nearly one in three chance of a U.S.- style market correction where housing is experiencing the biggest price falls on record. Many U.S. homeowners are now stuck with bigger mortgages than their property is worth.
House prices had their most widespread decline across Britain for 30 years in April, according to figures released by the Royal Institution of Chartered Surveyors on Tuesday, falling in every part of the country.
Tumbling house prices may further dent consumer confidence which is at levels not seen since the recession of the 1990s — something the ruling Labour party is keen to avoid as it already faces diminishing voter support.
Property Web site Rightmove said this week that over one million properties were currently for sale in the UK, 15 percent more than a year ago, but the average selling time had gone from 71 days to 85 days.
However, it is not all doom and gloom in the property market. Last week a wooden beech hut in Suffolk was valued at up to 80,000 pounds while housebuilders have been taking advantage of falling land prices and snapping up plots that were previously too expensive.
RATE CUTS
The Bank of England cut interest rates by 25 basis points to 5.0 percent in April after making a similar cut in February. These followed a 25 point cut in December, the first reduction in two years.
But forecasters are wavering on their calls for another cut in June as consumer price inflation has rocketed to 3.0 percent. UK rates have not fallen nearly as fast as in the U.S. where they have plummeted 325 basis points since September in an attempt to avoid a recession in the world's biggest economy.
BoE policymaker and arch-dove David Blanchflower has warned that house prices could fall as much as a third and the economy will slip into recession unless the bank takes swift action.
Many lenders have been tightening credit conditions for new borrowers even though base rates have dropped. Millions of homeowners are set to be hit by higher mortgage rates when cheaper fixed-rate deals from two years ago expire this year.
HBOS, Britain's biggest mortgage lender, and Alliance & Leicester are among banks asking for larger deposits and raising the criteria to obtain credit as they try to avoid risky lending. "Banks are likely to remain markedly more circumspect in their mortgage lending, as they should be," said Howard Archer at Global Insight.