In a Q4 housing market report, Capital Economics predicts that house prices will decline by 5% in both 2012 and 2013.
And it says that the threat of another major financial crisis and a return to recession mean that risks to its forecasts are to the downside.
The report says that the UK’s economic recovery weakened noticeably in Q3, while employment growth has turned negative once and again and further job losses are on the horizon.
It says: “Against this backdrop, house prices have further to fall. While traditional valuation metrics are not a perfect guide to the scale and timing of future price movements, they suggest that housing is overvalued by up to 20% relative to historical norms.
“Admittedly, mortgage approvals rose to a 20-month high in August, but housing market activity remains well below the level that historically has been consistent with rising house prices. And if anything, the renewed slump in consumer confidence suggests that fresh falls in mortgage approvals are likely.”
Capital Economics adds that low mortgage rates have been supporting lending volumes, but they could soon start to rise as a result of the eurozone crisis, stifling demand.
It says: “Even without higher mortgage interest rates, households are rapidly approaching the point at which the benefits of previous interest rate cuts will have been completely eroded by the rising cost of living.”