The latest quarterly Consumer and Housing Prospects report from the CEBR predicts that house prices could fall by as much 40% this year peak-to-trough if the government fails to kick-start lending soon.
It would mean that the housing market would continue to stagnate through 2010 and 2011 and house prices would sink below 2003 levels until 2013.
Even if the government does manage to stimulate lending the economic consultancy firm is forecasting house prices will still fall 32% from the peak levels seen in Q3 2007.
The worst case scenario for mortgage approval levels this year is just 32,000, compared to 54,000 if government lending initiatives are successful.
Ben Read, managing economist at the CEBR, says: “The housing market has been at the centre of the credit crunch story, which as we all know has unfolded into the biggest economic crisis for a generation.
“We now stand at a point where direct government intervention to increase the level of mortgage availability – such as new issuance of mortgage-backed securities – will certainly stimulate housing market activity and stem falling prices.”
He adds: “Whether this would be enough to shore up consumer confidence and plant the first seeds of a broader recovery is open to question.
“But it is clear that no action at all will mean another year of disaster for house prices and the wider housing sector.”