Item Club issues grim housing forecast

Published on Saturday 19 April 2008 13:57

THE UK economy is in line for two years of below-trend growth with house prices falling 10% unless the Government takes firm and decisive action, Ernst & Young's Item Club has warned.

Tough market conditions and an over-reliance on international banking has prompted the respected forecaster to predict a fall in sub-trend growth from 3.1% in 2007 to 1.8% this year and 1.5% in 2009.

It also predicted the outlook for the housing market and the high street is about to get a lot worse, despite further predicted cuts to the Bank of England base rate to 4.5% by the year end.

Peter Spencer, chief economic adviser to the Ernst & Young Item Club, said: "This is going to be a rapid, painful adjustment and it will be a rough ride for a substantial proportion of the population. We are facing a massive sea change in the balance of economy."

The fact that overseas banks will no longer buy UK mortgages and that banks are not lending to each other is hitting the housing market very hard, creating a famine in the mortgage market.

Item expects house prices to fall by 10% and the numbers moving home will fall by 40% over the next two years.

Spencer added: "It will be particularly painful for those that have recently stepped onto the housing market ladder and those coming off cheap two-year fixed mortgages."

Poorer families would be hardest hit, he added.