House prices to fall again in first half of 2010

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the recent rally in the UK housing market is a "false dawn" and prices are likely to fall again in the first half of 2010, according to an influential forecasting group.

The Ernst & Young Item Club forecasts that house prices are "likely to stagnate" for the next two years and will not return to their peak in the autumn of 2007 for more than five years. Held back by unemployment and a lack of affordable mortgages, the recent rise in prices "cannot be sustained beyond the spring of 2010", according to its report, which is out today.

Hetal Mehta, the senior economic advisor to the accountancy firm's unit, said: "The current stabilisation in the housing market is a false dawn. 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."

Despite the banking crisis and rising unemployment, the housing market had defied doom-laden forecasts this year. UK house prices are now higher than they were at the start of 2009, with the average price rising in August to £160,973, according to the Halifax's latest monthly survey.

Ms Mehta said that a small group of cash-rich buyers have supported prices but, as the supply of these funds is limited, prices are likely to fall again in the first half of next year.

"Mortgage lending remains depressed and with 56 per cent of owner occupiers having a mortgage, it would be difficult to make a case for a sustained pickup in prices without a recovery in mortgage lending," she said. "However, this would still appear to be some way off."

Ernst & Young's forecasting unit pointed out that a shortage of first-time buyers, who typically purchase cheaper properties, will have serious implications for those looking to trade up, clogging the market and stifling the volume of transactions taking place.

In addition to the high cost of mortgages – despite sharp falls in Libor – rising unemployment is likely to prevent a strong rebound in house prices. The Item Club forecasts that unemployment will peak at 8.8 per cent or 2.76 million next spring.