City warns of 10% slump in house prices

Homeowners told market could struggle until 2012, and that Britain may be 'flirting with recession'

British house prices are set to tumble by more than 10 per cent next year, according to City traders. This weekend they warned that residential property values might continue to suffer up until 2012.

In a dramatic turnaround, bearish investors in the Square Mile are betting that values will slide by 10.5 per cent by the end of November next year, with the average price of a house in Britain dipping back to 173,861.

The figures will come as a bitter blow for homeowners hoping for a less precipitous fall in house prices following last week's quarter-point cut in interest rates from the Bank of England.

At the beginning of 2007, those same traders estimated that the price of the average UK house would climb to 194,985 at the same point, as measured in the house price index at City brokerage Tradition Financial Services.

Peter Sceats, director of property real estate at TFS, said a hardening of opinion had surfaced in recent months, with "the overriding sentiment in the market continuing to be very bearish despite the rate cut".

Mr Sceats added that derivative or "forward values" for house prices, as measured by the TFS index, had begun to turn down much earlier in 2007 than many of the mainstream indicators such as the Halifax or Nationwide indices.

On Thursday, the extent of any downturn in house prices in 2008 should become more apparent when the Royal Institution of Chartered Surveyors (Rics) produces its November indicator on the housing market, which last month showed October house prices falling at their fastest since mid-2005.

Further weakness is likely to heap more pressure on the Bank of England to bring forward further rate cuts to the first part of 2008.

Diana Choyleva, an economist at Lombard Street Research, said she expected a further 25 basis-point cut in the first quarter of next year, adding that January's private sector pay round would determine the speed of any further rate moves.

"Likely continued inflation worries argue for a slower pace of monetary easing at the start of next year," said Ms Choyleva.

Concerns about deterioration in the housing market come amid a warning from the influential Ernst & Young Item Club that Britain's wider economy is set to suffer from the effects of the credit crunch that has blighted the financial services sector.

The group said the economy would also suffer from a slowdown in public spending growth, high oil prices, the lagged effects of earlier rate rises,Just last week, Invesco Perpetual's star fund managerNeil Woodford warned: "There is every possibility that the housing market... will deliver a shock to consumer confidence and spending. In this situation, it is likely we will flirt with recession."