House prices ready to stall, experts warn

With the number of homes for sale falling, Item Club predicts stagnation - but not a crash

Demand is likely to fall and house prices may stall through 2008, warns Ernst & Young in its latest Item Club forecast, due to be published tomorrow. But the accountancy firm is more optimistic than many about the UK housing market's prospects. With the labour market strong, it thinks "it is unlikely that there will be a major housing recession".

While prices in the housing market have no longer been rising at double-digit rates, demand has held up surprisingly well given increases in interest rates over the past year, and the widespread view (until the Northern Rock debacle) that further hikes were inevitable, Item said in its autumn forecast.

However, a raft of financial data out last week pointed to trouble ahead for house prices. The International Monetary Fund warned that the UK was among the countries most at risk of a price correction.

Moneyexpert.com, the financial information pro-vider, reported that the number of new mortgage applications rejected since March had increased by 60 per cent to 738,000. And the US Treasury Secretary Henry Paulson suggested the economic fallout from the crisis in the US housing market could continue for some time, indicating that its sub-prime problems could be worse than expected.

Not only is demand slowing, but the supply of houses for sale may be shrinking. Mortgage broker and former City trader William French said: "Estate agents are telling me that fewer people are putting their homes on the market since the introduction of home information packs [HIPs]. People are more reluctant ... as they now have to pay, on average, £500 to do so.

"Normal rules of supply and demand don't necessarily apply when it comes to homes ... People were putting their homes on the market even if they hadn't decided if they wanted to sell. If a buyer came along they would be more likely to start looking to move." jshillingford@gmail.com willefrench@btinternet.com