Housing slump 'to hit economy'

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Housing sales could fall at least 40% this year as would-be buyers struggle to gain mortgage deals from more cautious lenders, according to RICS' latest housing forecasts.

And the drastic fall-off in deals could hit consumer spending by more than 8% compared with last year, the organisation suggests.

RICS chief economist Simon Rubinsohn said: "This could have important ramifications for the wider economy - not only hitting the property industry directly but also impacting on a broad range of related sectors, whether high street purveyors of home furnishings and white goods or financial intermediaries involved in providing mortgage advice."

The warnings follow figures from the Council of Mortgage Lenders (CML) last week showing the number of loans for house purchases plunging to 142,000 between January and the end of March - the lowest on record since the first quarter of 1975.

RICS predicts house prices will fall around 5% this year, a more modest decline than some forecasts. It says the market will escape the slump of the early 1990s because of a lower number of distressed sellers compared with 15 years ago, when homeowners were struggling with soaring interest rates.

The fundamental shortage of housing - exaggerated by recent decisions from major builders to shelve projects in a cooling market - will also limit the impact of price falls, it argues.

RICS added: "Homeowners are less vulnerable to repossessions than during the early 1990s housing market crash. There is little evidence in RICS analysis that distressed sales, which characterised the 1990s, are picking up."

The organisation predicts repossessions will rise to 43,000 in 2008, although these peaked at nearly 76,000 during 1991.

But Mr Rubinsohn added: "The second half of 2008 will prove a difficult period for the housing market. Money looks set to remain tight and many will continue to find that access to the market is restricted by cautious lenders. Demand will remain pent up with many watching the high street banks for any sign of a softening in lending criteria."