Deloitte Says House Price Slump Could Provoke Period Of Slow Growth

The economy is poised for its weakest period of growth since the Exchange Rate Mechanism crisis of 15 years ago, with a danger that it could slide into recession, according to a forecast for Deloitte, the accountancy group.

Roger Bootle, economic adviser to Deloitte, said that the growing vulnerability of the housing market would be instrumental in the downturn.

Deloitte’s quarterly economic review predicts that house prices will slump by 5 per cent this year and 8 per cent next year.

Mr Bootle first called a downturn in the housing market in 2005 and, although prices began to slow that year, they recovered quickly. He says that the present downturn in global markets, coupled with the credit crunch and overvalued housing, means that house prices are destined to fall.

His comments came as it emerged that house prices in England and Wales have fallen during January. Hometrack, the property research group, said that house prices fell by 0.3 per cent this month, compared with December.

While a slump in house prices may be good news for first-time buyers, Mr Bootle said that job losses could undermine the housing market even further. He said: “A prolonged economic downturn may force employers to wield the axe more sharply than in briefer downturns.”

Last week, Citibank dismissed hundreds of its staff in London as the Centre for Economics and Business Research, an independent think-tank, increased its forceast for City job losses by 20 per cent. It expects 8,000 job losses in the City this year.

While the sluggish housing market in 2005 was revived by strong British exports, Mr Bootle said that gross domestic product was expected to slow sharply, providing no rescue for the troubled housing market. “We expect GDP to slow . . . from 3.2 per cent last year to around 2 per cent this year and to below 2 per cent in 2009. This would be the weakest performance of the UK economy over two years since 1991 and 1992,” he said.

Mr Bootle is not alone in forecasting a slowdown in the UK. In a recent survey by The Times, several economists, including Philip Shaw, chief economist at Investec, and George Buckley, chief UK economist at Deutsche Bank, suggested that GDP would slow in the coming year.

Simon Rubinsohn, chief economist at the Royal Insitution of Chartered Surveyors (RICS), does not agree that house prices will fall. He said: “The housing market will be soft in the first half of the year, but base-rate cuts should provide support. The risks for the market are skewed on the downside, but the numbers broadly support a forecast of flat prices this year.”

There are fears that rate cuts could be undermined by banks increasing their mortgage rates in an effort to boost their coffers in the wake of the credit crunch.

Many lenders have also tightened their lending criteria, becoming much less generous with the sums that they are prepared to lend to prospective buyers. A couple of years ago there were plenty of home loan deals that offered borrowers the chance to access 100 per cent of the asking price. Now lenders are keener for buyers to save up a deposit.

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