House prices could tumble 40%

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The centre for economics and business research (cebr) said house prices would fall by a record amount in 2009 unless there was an improvement in lending conditions.

The independent consultancy group predicts prices will drop by 32% from their peak in the third quarter of 2007 to their trough in the first three months of 2010, if the Government's banking bailout leads to a modest improvement in mortgage approvals from around 32,000 a month now to 50,000 a month in 2010.

But if the Government's action fails to stimulate this pick up, house prices could fall by a further 25% from their current level, meaning a total drop of 40% since they first began to slide in 2007.

The property market would then stagnate throughout 2010 and 2011, and house prices would remain below their 2003 levels until 2013.

Benjamin Williamson, one of the report's authors and an economist at cebr, said: "The glimmer of light at the end of the tunnel for the beleaguered housing market is that prices and interest rates are now at levels whereby any improvement in lending is likely to lead to substantially increased activity and at the very least a bottoming out in house prices.

"However, if lending remains close to current very low levels, the spectre of the biggest annual drop in UK GDP since post-war demobilisation in 2009, with concomitant rises in unemployment and collapsing confidence, will likely lead to an acceleration in house price falls."

Ben Read, managing economist at cebr, added: "We now stand at a point where direct government intervention to increase the level of mortgage availability - such as new issuance of mortgage-backed securities - will certainly stimulate housing market activity and stem falling prices.

"Whether this would be enough to shore up consumer confidence and plant the first seeds of a broader recovery is open to question. However, it is clear that no action at all will mean another year of disaster for house prices and the wider housing sector."