UK: W-shaped Recovery Forecast

September 15th, 2009

House prices are forecast to suffer a significant fall over the next 18 months as an “irrational” rally ends, according to a report today from a leading property consultancy.

Housing analysts are increasingly predicting the likelihood of a W-shaped cycle where the recent house price bounce tails off and falls back in 2010 before recovering again in 2012.

Jones Lang LaSalle, the property adviser, says the market stabilisation looked unsustainable and forecast that prices would drop about 7 per cent next year.

James Thomas, head of Jones Lang LaSalle’s residential team, said that the rally would soon weaken with a sustained housing market recovery likely to be deferred until 2012.

The value of the average home has risen by 8 per cent since March, according to Jones Lang LaSalle, but this revival has changed substantially the outlook for annual house price growth over the next couple of years. It says a sharper drop followed by a more certain recovery would have been preferable for the medium-term outlook.

The consultancy expects average house price growth to be flat during 2009 and weaken in 2010. A subsequent recovery is expected to see UK house price growth of above 8 per cent again by 2014.

Mr Thomas said: “The unforeseen and seemingly irrational pick-up in prices has altered the outlook for UK house prices but it is likely that this recovery will prove temporary.

“The economic fundamentals that have supported the upturn, most notably the constrained supply of housing for sale, will be eroded as unemployment hits a peak and while mortgage lending remains weak.”

Further evidence emerged yesterday of the strength of the recent rally, with the Halifax house price index showing a rise 0.8 per cent in August, the third increase in the past four months. The improvement pushed the annual rate of house price inflation from -12.1 per cent in July to -10.1 per cent in August, and means the market has been flat overall this year.

Other analysts are also sceptical about the sustainability of the house price rally, however, with Capital Economics pointing out that the monthly increase was the lowest of the gains to date. It said: “In our view, the outlook for economic growth is very weak. And if the economy turns out to be stronger than we expect, economic policy will be tightened. With the market still overvalued, neither outcome looks good for house prices.”

Keshav Thukaram, managing director of Smartlandlord.co.uk, the buy-to-let website, called the housing rally a “false dawn in a mini-bubble”.

Story from FT.com

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