U.K. Housing Slump to Resume in 2010, Item Club Says

By Jennifer Ryan

Sept. 14 (Bloomberg) -- The U.K. housing market slump will resume next year as the squeeze on mortgage lending persists, Ernst & Young LLC’s Item Club said.

After “dipping” in the first half of 2010, prices will then stagnate for two years, the research group, which uses the same economic model as the U.K. Treasury, said in a report today in London. Mortgage finance may “remain scarce and expensive” as banks rebuild balance sheets while the economy emerges from the recession, the Item Club said.

U.K. house prices rose the most since 2006 in August amid a shortage of supply, Nationwide Building Society said last month. The slump, which erased 15 percent from home values since the decade-long housing boom peaked in 2007, has left many mortgage holders owing more than their properties are worth.

“The current stabilization in the housing market is a false dawn,” Hetal Mehta, senior economic adviser to the Item Club, said in a statement. “Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years.”

The number of U.K. loans for house purchase rose 24 percent in July from the previous month to 56,000, the Council of Mortgage Lenders said today. Still, the Bank of England’s data on mortgages show the number of approvals is less than half the total in the same month two years ago.

The central bank said on Sept. 10 it will continue a plan to buy 175 billion pounds ($292 billion) of bond purchases while keeping the key interest rate at a record low of 0.5 percent. Policy makers are trying to cement the economy’s recovery from the worst contraction in a generation.

Peak Prices

The Item Club said house prices won’t recover to the peak reached in 2007 for another five years. The pickup will be driven by the economy’s recovery and a continued supply shortage of new properties.

While the government aims to build 240,000 homes a year through 2016, today’s report says the program is already behind schedule after the construction industry slumped. The group estimates the number of new properties completed this year will be below 175,000.

Southern England will lag the recovery in the short-term because first-time buyers will have the hardest struggle to afford new homes, the Item Club said.

“In order for the housing market to function properly it is essential that first-time buyers are bought back into the market,” Andrew Goodwin, senior economic adviser to the club, said. Otherwise, “the current status quo of a low number of transactions, dominated by speculative cash buyers, is likely to be maintained.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net