The threat of a sustained downturn in the housing market grew yesterday after a leading investment bank forecast that property prices would fall for the next two years.

Goldman Sachs said it expected house prices to fall by 5 per cent this year and a further 2 per cent in 2009. The bank had originally predicted a decline of 3 per cent in 2008 and no further change the year after, but became more pessimistic after economic warning signs.

The predictions came as another set of bleak figures showed that first-time buyers were spending the highest proportion of their income on mortgage interest repayments since the recession of the early 1990s.

Leading economists gave warning of a “very real danger” of a sharp housing market correction that could lead to recession, after findings from the Council of Mortgage Lenders (CML) showed that interest on mortgage repayments is eating up more than a fifth of the average disposable income of a new homeowner.

The proportion of income that a first-time buyer spends on mortgage interest was 20.7 per cent in December 2007, compared with 17.9 per cent a year ago. The figure has not reached this level since 1991, before the housing market crashed in 1992.

The CML said that the size of the average home loan also rose, from 3.34 times a typical first-time buyer’s income in December 2006 to 3.38 times at the end of last year.

Experts blamed tighter mortgage lending in the wake of the credit crunch and interest rate increases between August 2006 and August 2007 for the squeeze, dismissing claims that further cuts to the base rate will solve the problem.

Banks and building societies have been cutting back on the amount they are willing to lend, as well as increasing mortgage rates, after last year’s US sub-prime mortgage crisis left them facing chronic funding shortages.

Howard Archer, chief economist at Global Insight, the economic analyst, said: “The data highlights the downward pressures on housing market activity and prices stemming from stretched affordability and tighter lending practices. While the Bank of England’s trimming of interest rates in December and last week will help matters, the overall downward impact on mortgage rates has been limited by a lack of funds for lenders, as well as lenders wanting higher margins due to increased risks.

“There is clearly a very real danger that a sharp housing market correction could occur. Conversely, a sharp housing market correction would increase the risk of recession.”

Goldman blamed tighter credit conditions, falling house price expectations and falling mortgage approvals for its downbeat outlook.

The bank also revised downwards its forecast for the number of property sales it expects in 2008, after weak trading updates from housebuilders showed that forward orders were down by more than 10 per cent. It expects property sales this year to fall by 16 per cent, after a previous forecast of a 10 per cent decline.

The CML yesterday called for the Chancellor to raise the Stamp Duty threshold, after it found that only 40 per cent of first-time buyer properties fell under the current limit of £125,000.

The number of surveyors reporting falls in house prices grew for the sixth consecutive month for the first time since the early 1990s housing crash, new figures show.

A total of 54.7 per cent more chartered surveyors saw lower house prices in January than those who reported rises, the Royal Institution of Chartered Surveyors said.

The figure was up from 49.1 per cent in December and has soared since the 3.1 per cent balance last August, providing more evidence that Britain is experiencing a housing market slow-down.

Last month’s balance is the highest since the 60.1 per cent recorded in November 1992, when the measure grew for five months running.

Government figures released yesterday showed a rise in average house price in December, from £218,662 in November to £219,591.

Squatter’s rights ruling hits home

Mortgage defaulters could face a tougher stance from banks after judges wiped out the debt of a man who had not paid anything towards his arrears for more than 15 years.

Banks have given warning that the Appeal Court ruling in Djabar Babai’s case may force them to take early action against debtors.

The last mortgage payment made by Mr Babai was £40 in January 1993. Because of the bank’s delay in taking action, however, the Appeal Court ruled that he had acquired squatter’s rights over his £200,000 home in Stockport, above, and that NatWest’s security was worthless.

Justin Fenwick, QC, for the bank, said that lending institutions could now be forced to issue possession proceedings “where they would not otherwise have done so”.

Lord Justice Mummery said that it was “an alarming, but unlikely prospect” and said that the practical implications of the decision “are in danger of being exaggerated”.

Mr Babai was made bankrupt in March 1993. The bank took no legal action to enforce its rights.

Lord Justice Mummery said that there should be no difficulty in lenders taking action “within the ample 12-year limitation period”.

(The Times 13/02/2008)

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