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Forecast Group Says House Prices Will Stagnate In 2008

A leading forecast group in the housing market has predicted that the housing market will come to a jarring stop next year at a point when the interest rate rises finally start to have a real impact on people’s budgets.

Ernst & Young’s ITEM Club forecasts that the seemingly unstoppable rise in house prices will finally come to a halt, falling from more than the current 10% to under 1% at the end of 2008. The Club calculates that the housing market is overvalued by as much as 16%.

If interest rates are pushed up to 6% - as is now widely accepted as highly likely – then the boom will be over for the property market, and will be followed by a decade of stagnation.

While householders are beginning to feel the squeeze on their finances, the Treasury is enjoying Christmas every day. Payments in tax increased by nearly 10% in the first three months of this year, compared with the same period in 2006. The growth in wages and salaries lagged behind at only 5.1%. Experts say that this “fiscal drag” gives the UK population a rising tax burden, and workers are having to pay more and more of their income in tax.

The ITEM (Independent Economic Model) Club is a respected economic forecaster, which correctly predicted the property boom in 1998. The Club looks forward for the next quarter, and says that the property market slowdown will be caused by the higher interest rates which, rather depressingly, the Club forecasts will stay with us at around 6% until 2012.

This will be grim news for first-time buyers who have seen the base rate rise five times in the last twelve months, chased very quickly by increases in mortgage interest rates. For those struggling to get on the property ladder, it must seem like they’re running ever faster to try and catch a car speeding away down the road.

The base interest rate currently stands at 5.75%, which has added around £105 to each monthly payment on an interest-only mortgage of £100,000 over 25 years, since last July when interest rates were down at 4.5%.

Most experts have been expecting the house price market to flatten out in recent months, but there have only been sporadic signs of this happening. House price inflation still stands at over 10%. Nearly all experts have shied away from forecasting a house price crash, the like of which we saw in the early ‘90s, but no one is saying that the current annual rate of 10% is going to carry on.

The ITEM Club has never forecast such a dismal outlook as the current report does, although it too stops short of suggesting there will be a house price crash, merely saying that prices will freeze. The report says that by the end of 2007, annual house price inflation will be down to 7%, and there will be a steady fall as it reduces to 1% by the end of 2008.

Just maybe, if house price inflation begins to slow, the Bank may see fit to hold interest rates no higher than 6%, and may even consider a drop in 2008.


Tom Smith
1st August 2007

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