House prices could fall by about 2 percent next year, but the decline could be more than twice that size if government spending cuts derail the recovery, the Royal Institution of Chartered Surveyors said on Wednesday.
The government will next year unleash austerity measures that are expected to cost 330,000 public sector jobs over the next four years, providing stiff headwinds to growth.
Uncertainty about the economic outlook has already discouraged some homeowners from moving, while tight credit conditions and weak morale have choked off demand from first-time buyers, putting pressure on prices this year.
House prices have been weakening since late summer after a rebound in late 2009. The Halifax house price index recorded its first annual fall in a year last month, while the Nationwide index for the same period was broadly steady.
However, neither lender sees much chance that the big falls logged during the financial crisis in 2008 will be repeated in 2011.
The RICS house price balance has been in negative territory since July, but the institution says a narrowing gap between the number of properties coming onto the market and demand for homes suggest that prices are likely to stabilise by mid-2011.
“Our suspicion is that prices in the final quarter of 2011 will in all probability not be very different from where they currently stand … prices may drop a negligible 2 percent,” RICS said in its forecast on Wednesday.
However, it cautioned that government cuts posed a risk as they could weigh on growth, drive up unemployment and force some homeowners to sell up.
In addition it warned that credit conditions were unlikely to ease soon as banks pass on the cost of refinancing some 500 billion pounds of debt by 2012.
“However, even in this environment our judgement is that the lack of new supply is likely to prevent the decline amounting to very much more than 5 percent,” it said.
LOW RATES HELP
Mortgage approvals — a leading indicator of house prices — are running at only half their long-term average rate of 90,000 per month, suggesting house prices have little room to rise, and RICS expects the number of housing transactions to hold broadly steady at around 900,000 next year.
But record low official interest rates will provide some support to the market, according to Halifax economist Martin Ellis, who, like most private sector economists, reckons the Bank of England will not start raising rates until late 2011.
“This will underpin the favourable affordability position for those able to enter the market and help to keep down the numbers of homeowners forced into selling their properties because they cannot keep up with their mortgage payments,” Ellis said.
“We do not expect to see a significant fall in house prices next year. Indeed, overall, we predict that prices at the end of 2011 will be at a similar level to that at the end of 2010.”