Annual house price growth will drop from 6.9% year on year in 2010 to only 2.2% in 2011 according to the latest forecast from the Centre for Economics and Business Research (Cebr) - one of the country's leading economics consultancies and respected commentators on the UK housing market.
Pulling house prices down will be squeezed disposable income and higher unemployment as public sector cuts take effect. But on the other side, continued record low interest rates and the likelihood of more quantitative easing will work to reduce long term interest rates and household borrowing costs. In addition, continued constraints on housing supply in the UK will work to offset the impact of weak disposable incomes.
Owen James, one of the report's authors and economist at Cebr said:
"We see a tough outlook for disposable incomes over the coming 3 years, especially in 2011 with the VAT rise and the hangover effect of commodity price rises. But it is highly likely the MPC will follow the Federal Reserve Bank with quantitative easing.
"This should reduce the cost of borrowing and lead to an expansion of bank lending into the mortgage market. By 2014 we expect the number of monthly mortgage advances to reach 77,000 from a current level of 47,000. While this will be far below the 2006 peak of 119,000, it should be sufficient to keep the market moving upwards."
Douglas McWilliams, chief executive of cebr added:
"Quantitative easing is a very powerful medicine and is likely to have a strong impact on the housing market eventually.
"House prices may not move much during 2011 but they are likely to rise significantly in the following three years on the back of quantitative easing to offset the impact of the fiscal retrenchment. This is how QE works to boost the economy."
