UK housing market 'set for bleak 2009'

The housing market endured a torrid time during 2008 and few economists expect 2009 to be much better, with some predicting prices could fall by up to 20% next year.

Homes have lost around 15% of their value during the past 12 months as the problems caused by the credit crunch exacerbated already stretched affordability.

But despite house prices dropping at a record rate for much of this year, it seems likely that the UK is only half way through the housing market correction.

Predictions for property prices during 2009 range from falls of 5% to ones of 20%, although some commentators say the market could begin to recover during the second half of the year.

The problem faced by forecasters is that there are now many different factors at play which could potentially impact the market in different ways.

Predicting house price changes has become so difficult that the Council of Mortgage Lenders has abandoned its annual forecast in this area altogether.

One thing that economists do agree on is that the credit crunch is largely to blame for the steep fall in house prices seen during the past year.

Turning off the tap of mortgage finance has severely limited property demand, and despite the hundreds of billions of pounds that the Government and Bank of England have pumped into the banking sector, there are few signs that the pressures caused by the credit crunch are easing.

There are now just a handful of mortgages available for people with only a 5% deposit and around 130 for people with a 10% one.

This is severely limiting for first-time buyers, and means that many people are unable to take advantage of the price falls seen to date as they still need to save for a larger deposit before they can get on to the property ladder.

First-time buyers are the lifeblood of the housing market, and without them people are unable to trade up the ladder, hitting property demand and causing the market to stagnate.

The problems in the mortgage market look set to intensify next year, with the Council of Mortgage Lenders predicting that net lending will be negative in 2009 for the first year on record.

It expects net lending, which strips out repayments and people remortgaging, to be minus £25 billion for the year, meaning that consumers will repay more in 2009 than they borrow.

At the same time, the economic downturn is causing unemployment to rise, which will inevitably lead to an increase in people unable to keep up with their mortgage.

There are fears that a steep jump in repossessions, which the CML has estimated could rise from 45,000 this year to 75,000 in 2009, will lead to a flood of distressed sellers coming on to the market, further depressing prices.

Capital Economics is among the most pessimistic in its house price forecasts, predicting prices could drop by another 20% next year.

Ed Stansfield, property economist at Capital Economics, said: "One of the key issues that is driving house price falls is the lack of mortgage finance."

Howard Archer, chief UK and European economist at IHS Global Insight, said: "We forecast house prices to fall by a further 15% in 2009 and then by a further 5% in the first half of 2010 before stabilising."

John Varley, group chief executive of Barclays, recently said he expected house prices to fall by up to 30% from peak to trough.

He said the UK was probably only half way through the housing market correction, with prices likely to fall by a further 10% to 15% during 2009.

But the Government has announced a number of initiatives to help people struggling with mortgage repayments stay in their homes, and while it remains to be seen how effective these will be, preventing a flood of properties coming on to the market could help to support prices.

At the same time, there is still a large pool of demand for property.

Many first-time buyers who have put off getting on to the ladder due to the current market conditions are still keen to buy their own home, while demographic factors, such as rising numbers of single households and foreign workers moving to the UK, are also continuing to boost demand.

The well documented problems in the construction sector also mean that very few new homes are being built, further exacerbating the imbalance between supply and demand.

And despite the fact that house prices are continuing to fall, there have recently been signs of an improvement in the market. The number of people looking to buy a new home increased for the first time in two years during November, according to the Royal Institution of Chartered Surveyors.

Surveyors also expect sales levels to pick up during the coming months, while the National Association of Estate Agents has reported an increase in the proportion of first-time buyers entering the market for three months in a row.

Meanwhile interest rates are at their lowest level since 1951, and even if lenders are not passing on the full cut, mortgage rates had already fallen to their lowest level for two years before December's 1% cut.

Affordability ratios are also coming down, with the house price to earnings ratio, dropping to 4.56 in November, its lowest level for more than five years and close to the long-term average of 4.0.

Ray Boulger, senior technical manager at John Charcol, is more optimistic than many forecasters.

He expects prices to fall by a further 5% to 10% during the first half of 2009, with the market stabilising by the middle of the year and beginning to recover during the second half, to leave house prices around 5% lower than they started the year.

He said: "Lower house prices and lower interest rates will bring enough buyers into the market to stabilise prices."

Property website Rightmove expects the market to bottom out during the second half of next year, with sellers dropping their asking prices by a further 10%.

But it expects the market to remain subdued with prices at around this level for at least a year.

The group also expects only around 600,000 properties to change hands during 2009, broadly equivalent to the historic annual demand from first-time buyers alone.

The Council of Mortgage Lenders is also predicting a low level of activity during the year, with around 700,000 transactions, compared with 900,000 in 2008 and 1.63 million in 2007.