The latest Housing Market Analyst report from Capital Economics – the most bearish of housing market commentators - predicts that house prices have a further 20 per cent to fall.
However, they expect most of this decline to occur in the first half of this year. Thereafter prices will fall by a further five per cent beyond "fair value" as low interest rates and more affordable property encourages greater activity.
The market, they add, should stabilise in early 2010, by which point the average value of a property in the UK will have fallen by 35 per cent from peak to trough.
Transaction Levels Will Improve
Although new buyer enquiries have started to creep up recently, implying that mortgage approvals could also begin to increase, Capital Economics think that any rise in market activity this year will be modest.
They predict 750,000 transactions in 2009, up from 630,000 last year but almost 40 per cent less than 2007.
Demand, they say, will be constrained as lenders continue to keep a tight hold on lending, particularly in the face of a deteriorating economic outlook.
The report even suggests that borrowers' priorities may shift from taking out new mortgages to paying off more of their existing debt; if this is the case, it says, net mortgage lending could turn negative this year.
Affordability Improving
For those who do have money to hand, the good news is that property is becoming much more affordable.
The report notes that affordability levels are now roughly in line with their long-term average.
However, the downside is that "tightened lending criteria and fewer potential homeowners have rendered this improvement largely irrelevant".
Even with the likely prospect of more interest rate reductions to come, Capital Economics believe that mortgage demand will remain low as lenders will be wary of passing on the full cuts against the poor economic outlook.
While they forecast that the Base Rate will drop to zero per cent, they anticipate that mortgage rates for new borrowers will only come down to three per cent per cent.
The report concludes: "While the deteriorating economic outlook increases the downside risks, if official interest rates fall to zero as we expect, that could support house prices and prevent them undershooting fair value by as much as in past downturns."
However, they expect most of this decline to occur in the first half of this year. Thereafter prices will fall by a further five per cent beyond "fair value" as low interest rates and more affordable property encourages greater activity.
The market, they add, should stabilise in early 2010, by which point the average value of a property in the UK will have fallen by 35 per cent from peak to trough.
Transaction Levels Will Improve
Although new buyer enquiries have started to creep up recently, implying that mortgage approvals could also begin to increase, Capital Economics think that any rise in market activity this year will be modest.
They predict 750,000 transactions in 2009, up from 630,000 last year but almost 40 per cent less than 2007.
Demand, they say, will be constrained as lenders continue to keep a tight hold on lending, particularly in the face of a deteriorating economic outlook.
The report even suggests that borrowers' priorities may shift from taking out new mortgages to paying off more of their existing debt; if this is the case, it says, net mortgage lending could turn negative this year.
Affordability Improving
For those who do have money to hand, the good news is that property is becoming much more affordable.
The report notes that affordability levels are now roughly in line with their long-term average.
However, the downside is that "tightened lending criteria and fewer potential homeowners have rendered this improvement largely irrelevant".
Even with the likely prospect of more interest rate reductions to come, Capital Economics believe that mortgage demand will remain low as lenders will be wary of passing on the full cuts against the poor economic outlook.
While they forecast that the Base Rate will drop to zero per cent, they anticipate that mortgage rates for new borrowers will only come down to three per cent per cent.
The report concludes: "While the deteriorating economic outlook increases the downside risks, if official interest rates fall to zero as we expect, that could support house prices and prevent them undershooting fair value by as much as in past downturns."
