HBOS downgrades forecast for property prices

Jun 19 2008

Economists have dramatically downgraded their forecasts for house prices this year as the credit crunch tightens its stranglehold on the mortgage market.

Britains biggest mortgage lender Halifax Bank of Scotland today became the latest group to revise its expectations, predicting a 9% slide in house prices during 2008.

This compares with its December forecast that the average cost of a home would end the year at around the same level it started it, and its more recent prediction of mid-single digit falls.

The group said its change reflected the UKs slowing economy, a rise in unemployment and limited scope for interest rate cuts amid soaring inflation.

At the end of last year many forecasters expected house prices to remain flat during 2008, with some even expecting a rise of 1%, while a few predicted falls of between 3% and 5%.

Today nobody is predicting a rise in prices, with economists instead saying the average cost of a home could slide by up to 12% both this year and next year.

The Council of Mortgage Lenders has seen one of the most dramatic changes to its forecast, going from predicting price rises of 1% for the year in December to falls of 7% now.

CML spokeswoman Sue Anderson said: We changed our view of the outlook for house prices when it became clear that the effects of the credit crunch were set to remain more severe and more long-lasting than had previously been apparent.

We continue to see the supply of funding to mortgage lenders, and hence to borrowers, as the fundamental issue constraining the housing market.

The credit crunch was already affecting the mortgage market in December, but its impact has become more severe since the beginning of this year.

In the past few months the rate at which lenders have been hiking their rates has accelerated, with the average cost of a fixed rate deal now at its highest level for 10 years.

At the same time, lenders have been demanding increasingly high deposits from borrowers, and there are now just 224 different mortgages available for people borrowing 95% of their homes value, compared with more than one thousand in July last year.

Borrowers now need a deposit of at least 25% in order to qualify for lenders best deals.

The tight lending conditions are restricting peoples ability to get on to the property ladder and to trade up it, constraining demand.

The situation is likely to get worse going forward with previously expected cuts in interest rates, which would have bought some relief, now unlikely to happen, while inflationary pressures could mean the next move in rates is up.

Kelvin Davidson, property economist at Capital Economics, said the single biggest issue driving the downturn in the housing market was the withdrawal of credit.

Capital Economics had previously forecast prices would fall by 3% in both 2008 and 2009.

It has since revised this to falls of 10% this year and 8% next year, and warned that if anything the risk to the forecast is on the downside.

Mr Davidson said: It is clearly down to the reversal of credit availability. Affordability hasnt really changed that much, things are still pretty stretched.

He said the withdrawal of mortgage credit, increases in mortgage rates and lenders reducing the loan to value ratios they were prepared to advance had all impacted the market.

Howard Archer, chief UK and European economist at Global Insight, has one of the most pessimistic forecasts, expecting house prices to dive by 12% both this year and next year, more than double his previous prediction of falls of 5% in both years.

He said: The bad news on the housing market is pretty relentless at the moment, with the low level of mortgage activity for house purchases being a consequence of a damaging mix of stretched buyer affordability and very tight lending conditions.

He attributed his forecast for increased price falls to the deteriorating economic environment, the persistently tight credit conditions and the fact that interest rates dont look like they are going to go down any time soon and may now go up.