House prices will drop 6pc in 2008 - and keep falling

House prices will decline by 6 per cent in 2008, and continue falling next year, as anxious homeowners rush to cash in their gains from the decade-long property boom, analysts at JP Morgan warned this weekend. Just three months after predicting that prices would remain stagnant for at least a year, Malcolm Barr, JP Morgan's chief UK economist, said the evidence now looked 'pretty bleak'.

The number of new mortgages approved - usually a good indicator of future demand - has slipped for seven months in a row. December's figure of 73,000 was the lowest since 1995. At the same time, the closely watched Nationwide and Halifax price indices have both showed prices weakening sharply.

'The rapid slowing in prices, the step-up in new supply, and the marked drop in household expectations for house prices suggests the credit crisis has encouraged existing homeowners who were considering a sale to move quickly, and accept a lower price, to realise existing capital gains before they are eroded,' said Barr.

Lenders hit by the credit crunch are tightening conditions on mortgages, potentially making it tougher for first-time buyers to enter the market. Several lenders dropped controversial 125 per cent mortgages this week, in the latest sign that it is becoming harder to borrow.

Michael Saunders, of Citigroup, predicted that the lending squeeze will depress house prices and lead to a 'marked slowdown' in consumer spending this year. He believes the Bank.....continued below

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of England will be forced to cut interest rates another four times, to 4.25 per cent.

Minutes published last week revealed that all nine members of the Bank's Monetary Policy Committee supported last month's rate cut. However, the committee is also concerned about inflation; since figures suggested that retail sales remained strong in January, they may wait and see before taking further action.

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