Worst house price slump for a generation!

House prices are set to slide for five years, according to this new report.

After weeks of Easter sunshine, the hottest April on record and a royal wedding, it's back to doom and gloom for Britain.

This morning, the National Institute of Economic and Social Research (NIESR) released its latest forecasts for the UK economy, which make for depressing reading.

Life after the storm

According to the NIESR, the UK economy will grow by 1.4% this year and 2% next year. These figures are well below the official Office for Budget Responsibility's estimates of 1.7% and 2.5%. In other words, the economy will grow more slowly than expected, making our post-crash pain linger.

However, these independent economists have some good news for hard-pressed consumers: inflation (the rising cost of living) is set to fall back. The Consumer Prices Index (CPI) measure of inflation will peak at 4.5% this year, before easing to 1.9% in 2012. This will lead to a fall in consumer spending of 0.6% this year.

House prices set to slide

The NIESR has some bad news for the UK's 17.5 million homeowners, but good news for first-time buyers and those aiming to move up the property ladder.

It estimates that 'real' house prices (after adjusting for inflation) will fall 4.5% this year. In other words, it is predicting flat house prices in 2011, as this 4.5% drop will be fully accounted for by inflation at 4.5%.

Furthermore, from 2012 to 2015, the NIESR predicts real house prices will fall by an average of 1.5% a year. Thus, by 2016, these economists expect house prices to be down by 10.5%, after adjusting for inflation.

If the NIESR is correct, then 2011-15 would see the most sustained slump in house prices since records began in 1963. In the NIESR's words, "It will be the longest period of falling house prices that we have seen."

Why will house prices fall?

In the words of former US President Bill Clinton in his 1992 election campaign "It's the economy, stupid!"

For sure, house prices are going to struggle, thanks to this toxic cocktail of seven ingredients:

• the continuing squeeze on household incomes caused by low wage increases and high inflation;
• cuts in government spending, leading to higher taxes and lower benefits;
• higher unemployment, fuelled by the loss of 500,000 public-sector jobs;
• higher mortgage rates as the Bank of England tightens monetary policy by raising its base rate;
• the end of the huge liquidity support provided to lenders by the Bank of England's Special Liquidity Scheme and Credit Guarantee Scheme. From April onwards, this will drain roughly £250 billion from banks' reserves;
• mortgage lending for new purchases running at less than half peak levels; and
• the end of 'mad mortgages', such as self-certified 'liar loans' and 100%+ home loans.

What about the supply squeeze?

Despite these challenges, optimists claim that an imbalance between supply and demand in 'this small island' will force up house prices. Not so, according to the NIESR!

It found that, during the boom, '...supply constraints were less important than is often argued, since supply just about kept pace with household formation.'

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In fact, the NIESR argues that looser lending -- in the form of lower deposits and higher loan-to-value (LTV) ratios -- played a much greater part in inflating the housing bubble. Hence, it argues that future house prices would be more stable were limits to be imposed on LTV ratios.

Are falling house prices a bad thing?

With more than half (53%) of UK net personal wealth tied up in housing, falling house prices would make us less wealthy as a nation. Then again, lower prices will make home-ownership more affordable, helping to lure the next (heavily indebted) generation onto the property ladder.

What's more, lower spending on housing costs will leave more income to spend in the wider economy, helping to stimulate growth and create jobs. Also, putting less money into bricks and mortar and more into productive businesses will help companies to expand and grow, thus benefiting us all.

Finally, why do we grumble when the prices of food, fuel and other essentials increase, but cheer when house prices rise? Unless you're a property investor, or plan never to move up the housing ladder again, this simply doesn't make sense!

Thus, here are seven reasons to cheer lower house prices.

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