House prices will take five years to return to peak

House prices will not return to the peak reached in autumn 2007 for at least another five years, according to Ernst & Young’s Item Club.

The influential group’s gloomy forecast contradicts the increasingly optimistic outlook of the Government and some commentators that the British economy has begun a sustained recovery.

The recent rise in property values is a “false dawn” that will not last beyond spring, Hetal Mehta, Item’s senior economic adviser, said. In a special report released today, Item predicts that homeowners are in for a drop in prices in next year’s first half and then two years of stagnation.

Sustained recovery will start only in 2011 and take until at least 2014 to return prices to their 2007 high, Item says.

The housing market is sicklier than many think because several fundamental problems have not been solved. First-time buyers are continuing to find it very tough to get on the ladder, banks are reluctant to lend and many homeowners are trapped in negative equity and do not want to crystallise losses, Item said.

Rising unemployment — expected by Item to peak at 2.76 million, or 8.8 per cent next spring — will also hamper a strong rebound, it said. House prices have leapt in the past few months, partly because few properties have been put up for sale and well-off buyers with cash have snapped up those that have been listed for sale.

However, over the longer term, supply will freeze again, Item said, as cash buyers dried up and homeowners continued to be reluctant to sell while their property was worth less than it was a few years ago.

Would-be buyers would also be inhibited by a lack of attractive mortgage offers, Item believes. Although banks have promised to increase lending to mortgage customers, a greater priority is shrinking their balance sheets by reducing lending, it said. Mortgage availability was slightly up amid a plethora of funding packages created by the Government, but will stay very restricted, according to Item.

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