House prices 'will fall another 25% next year'

HOUSE prices could fall by a further 25 per cent by late 2009, influential economic analysts warn today.

Experts at the Capital Economics consultancy said the coming recession will speed up the housing market "correction". In an influential report published today, the analysts poured scorn on the Government's recent bank bailout, claiming it could fail to shore up the property market.

"Our view that house prices will ultimately fall by 35 per cent or a further 25 per cent from today's prices still holds", the report said.

"However, with the economy heading for a recession lasting for at least two years, we now think that those falls could be seen by late 2009 or early 2010 a year earlier than our previous forecast."

It concludes that the UK economy will shrink by 1 per cent in 2009 and by 0.5 per cent in 2010, and that unemployment will rise by almost 1.5 million.

But Capital Economics does not think that the deeper recession will necessarily result in a deeper housing market downturn.

"Our previous forecast already factored in a significant rise in unemployment and some falls in GDP", it said.

"We expect inflation to drop rapidly, allowing interest rates to fall to 2.5 per cent next year, if not lower, which will help to prevent a larger fall in house prices.

"But the deeper recession is likely to mean that the pace of house price falls will intensify."

The experts concede that the Government's bank rescue package might help to ease the mortgage credit squeeze given time.

However, this will be outweighed by the widespread expectations of further house price falls.