House prices 'to fall 5% by 2007'

The market is feeling the squeeze of rising debt

UK house prices are set to slide in the coming months but fears of a crash have been overdone, according to the Centre for Economic and Business Research.

Prices will fall 5% by 2007, a report from the economic consultancy warned.

"Fewer homes will sell and prices will edge down - but they won't collapse," said CEBR report author Mark Pragnall.

The decade-long run of price rises will end this year, with the average price of a home at £163,353, and that will fall to £155,329 in two years' time.

Meanwhile, annual house price inflation will slide from 18.3% in 2004 to 4.2% this year, the CEBR report forecast.

Price squeeze

Fellow report author Thushani Gajasinghe added that higher interest rates, limited building of new homes, rising house prices, stealth taxes and student loans had all cut into the housing market

Price rises have been fine up to a point but they have overshot and now need to unwind Ed Stansfield, Capital Economics

"Higher stamp duties and tighter rules on inheritance tax and capital gains tax have added to the squeeze," he added.

Costs could rise even further in 2007 with the introduction of Home Information Packs.

Ministers confirmed on Monday that the packs - which will force sellers to provide a survey, searches and inspection reports at an expected cost of £1,000 - will be introduced in early 2007.

Nationwide economist Fionnuala Earley said the CEBR report was broadly in line with the building society's forecasts.

"The market is cooling slowly, but behaving remarkably well. By 2006 we expect prices to be neutral or see small falls, but nothing too drastic," she said.

However, economist Ed Stansfield at Capital Economics said the CEBR had been slightly over-optimistic, adding he expected prices to fall by a much larger 6-7% by the end of the year.

"Most statistics scream to me that the boom has gone too far," he told BBC News.

He said mortgage costs as a proportion of take-home pay, valuations and mortgage affordability could not continue to rise against a background of falling consumer spending and changing labour market conditions.

"Price rises have been fine up to a point but they have overshot and now need to unwind," he added.

'Temporary correction'

Despite the CEBR's reasonably upbeat report, the figures are lower than it predicted a year ago.

Limited new builds, lower immigration forecasts and changing lifestyle trends had all contributed to it cutting its average house price forecast by £17,000.

It explained it now expected the number of households in the UK to rise by 13.6% over the next 20 years rather than 14.2% - as more young adults flat share or stay on at the family home.

But while prices were set for a "temporary correction" property owners would not see a return to the days of negative equity.

Looking ahead, prices will begin to overtake levels seen this year by 2010 "then grow a little faster than average earnings, at about 4.7% a year".

But while there was some light at the end of the tunnel, the CEBR added a property slowdown could spell bad news for estate agents with 13,000 jobs expected to vanish across the sector by 2007.