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From The Times
February 13, 2008
House prices set to fall by 7% in next two years as credit squeeze bites
Rebecca O’Connor
The threat of a sustained downturn in the housing market grew yesterday after a leading investment bank forecast that property prices would fall for the next two years.
Goldman Sachs said it expected house prices to fall by 5 per cent this year and a further 2 per cent in 2009. The bank had originally predicted a decline of 3 per cent in 2008 and no further change the year after, but became more pessimistic after economic warning signs.
The predictions came as another set of bleak figures showed that first-time buyers were spending the highest proportion of their income on mortgage interest repayments since the recession of the early 1990s.
Leading economists gave warning of a “very real danger” of a sharp housing market correction that could lead to recession, after findings from the Council of Mortgage Lenders (CML) showed that interest on mortgage repayments is eating up more than a fifth of the average disposable income of a new homeowner.
The proportion of income that a first-time buyer spends on mortgage interest was 20.7 per cent in December 2007, compared with 17.9 per cent a year ago. The figure has not reached this level since 1991, before the housing market crashed in 1992.
The CML said that the size of the average home loan also rose, from 3.34 times a typical first-time buyer’s income in December 2006 to 3.38 times at the end of last year.
Experts blamed tighter mortgage lending in the wake of the credit crunch and interest rate increases between August 2006 and August 2007 for the squeeze, dismissing claims that further cuts to the base rate will solve the problem.
Banks and building societies have been cutting back on the amount they are willing to lend, as well as increasing mortgage rates, after last year’s US sub-prime mortgage crisis left them facing chronic funding shortages.
Howard Archer, chief economist at Global Insight, the economic analyst, said: “The data highlights the downward pressures on housing market activity and prices stemming from stretched affordability and tighter lending practices. While the Bank of England’s trimming of interest rates in December and last week will help matters, the overall downward impact on mortgage rates has been limited by a lack of funds for lenders, as well as lenders wanting higher margins due to increased risks. “There is clearly a very real danger that a sharp housing market correction could occur. Conversely, a sharp housing market correction would increase the risk of recession.”
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