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UK house prices forecast to fall 14% in 2009

  House prices have yet to trough and it will be at least a year before they stabilize despite interest rates remaining at a record low, a Reuters poll showed.

Average house prices are seen falling 14% this year after plummeting 16% in 2008 and are likely to fall a further 4% in 2010, the poll of 36 analysts at banks, investment firms and consultancies found. “We see weak activity in the short term and with concerns in the market this will continue the downward price momentum,” said David Page at Investec.

Houses are the bedrock of consumer wealth but prices nose-dived last year, knocked by the global financial crisis, as a bubble that saw average values triple over the prior 10 years burst as the key driver -- mortgage lending -- dried up.

Prices are expected to have fallen by about a third from their peak in 2007 before rising again, in line with predictions from a poll taken in January. Twenty-three of 34 forecasters said it would be at least a year before the market stabilized.

“We are seeing some increase in pipeline demand, buyers are becoming interested in ... houses and affordability is driving that while interest rates are dramatically lower,” said Page, who sees the market stabilizing at the end of the year.

The survey will disappoint anyone that bought a new property in recent years when UK banks were handing out money at record low rates while imposing historically lax restrictions on how much one could borrow, sometimes 125% of a home’s value.

Lenders have since tightened credit conditions for new borrowers and mortgage approvals, loans agreed but not yet made and a good early indicator of where house prices are headed, held steady at 31,000 in January, not far off record lows.

The poll found monthly mortgage approvals at around 36,000 in six months and 53,000 in a year, similar to January’s poll, but nowhere close to the average of 104,000 seen in 2007.

“Credit conditions currently remain very tight, so it is still very difficult for many people to get a mortgage or find the required larger deposit,” said Howard Archer at IHS Global Insight.

The house price to earnings ratio -- a key affordability measure -- declined from its peak of 5.84 in July 2007 to an estimated 4.42 in February 2009, according to the Halifax, the lowest in six years.

The Reuters poll showed that ratio going even lower to 4.0, a level not seen since the 3.97 witnessed in August 2002. The lowest PE ratio since comparable Halifax records began in April 1983 was 3.09, last seen in April 1999.

February data from mortgage lenders Halifax and Nationwide showed that house prices have fallen around 20% from their peak in late 2007. The average asking price in March was £218,081 ($317,556).

However, the poll found economists thought properties were still overvalued, giving a median rating of 7, where 10 was extremely overvalued and one extremely undervalued compared to fundamentals.

The BoE (Bank of England) has slashed a whopping 450 basis point from interest rates since October, putting them at just 0.5%, and the bank has begun quantitative easing, effectively printing money, in an effort to encourage lending and kick-start the economy.

Britain’s economy entered recession at the end of last year for the first time since the early 1990s. It contracted at its fastest pace since 1980 in the three months to December and is expected to keep shrinking for most of this year.

Repossessions of homes hit a 12-year high last year, with 40,000 Britons losing their home, the Council of Mortgage Lenders said last month, adding that they think 75,000 will suffer a similar fate this year.

British house builders, such as Bovis Homes and Barratt Developments have been battered by the stagnant market, seeing profits crash despite cutting costs and slashing huge amounts of their work forces. And British commercial property has not escaped the downturn with prices slumping 39.5% since its June 2007 peak, benchmark data from Investment Property Databank showed. (Reuters)