House prices could fall by up to 20% over the next two years as rising unemployment and spending cuts stifle demand, according to analysts.
The prospect of higher interest rates and stricter lending criteria from banks is also likely to add to the downward pressure on house prices in the near to medium-term.
The average UK home lost around a fifth of its value post-credit crunch between mid-2008 and the end of 2009. Half of these losses were regained last year thanks mostly to record low interest rates.
The Bank of England is under mounting pressure to increase interest rates in the light of runaway inflation that is likely to peak at around 5% later in the year. The Bank’s analysis that rocketing prices are the result of “temporary” pressures is beginning to be “wearing thin” with experts.
Paul Diggle, a property economist at consultancy Capital Economics, said: “Prices are trending slowly downwards at the moment, but our view is that this is really the start of the second leg of the correction, and we expect prices to fall significantly further,”
He says the average home is still 20% overvalued and that conditions could be ripe throughout the rest of the year to bring prices back down to earth.
Andrew Brigden, of financial research group Fathom, says that prices could be up to 30% too high. He predicts that a correction will come at some point even if interest rates are not increased. He said another possibility is that prices will remain flat for many years to come as wages slowly catch up.
The falls are predicted to vary from region to region with areas worst affected by public sector cuts and job losses likely to be the worst hit.
A survey by Rightmove today reveals a 21 % increase in the number of properties coming onto the market in London with activity “frozen over” in the rest of the country.
The property website’s latest housing survey showed that supply is far outstripping demand and suggested there were 1.3 million properties currently for sale, whilst there were only 530,000 mortgages approved throughout the whole of last year.
Miles Shipside, of Rightmove, said: “Not all properties marketed have to sell or stay on the market, with a percentage being withdrawn if they fail to find a buyer. There is still a clear imbalance between supply left on the market and demand even taking this into account. Demand is restricted by mortgage availability and potential buyers economic circumstances.
“The number of forced sellers and repossessions are the key factor that drives down prices, and to date lenders have shown considerable forbearance in how they manage arrears and are wary of flooding some markets by putting lots of repossessions up for sale.”
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