Rics: 40% drop in house purchases this year

In a gloomy economic forecast, the Royal Institution of Chartered Surveyors (Rics) has warned there could be a 40 per cent drop in property transactions in 2008.

This sharp decline could be accompanied by a five per cent drop in average prices, with the negative impact spreading to the wider economy.

At the end of 2007 Rics, along with the majority of observers, predicted house prices would remain stable throughout 2008.

The shortage of mortgage finance available to potential homebuyers will be the driving influence behind these falls, argues Rics.

As a consequence of the decline in the number of mortgage deals, consumer spending could fall by more than eight per cent compared with last year, the organisation finds.

"This could have important ramifications for the wider economy - not only hitting the property industry directly but also impacting on a broad range of related sectors, whether high street purveyors of home furnishings and white goods or financial intermediaries involved in providing mortgage advice," said Rics chief economist Simon Rubinsohn.

Last week separate research from the institution found sentiment in the property market has continued to slide dramatically in recent months.

The Rics arguments are also supported by the Council of Mortgage Lenders (CML), which published research last week showing the number of loans for house purchases fell to 142,000 between January and the end of March.

This is the lowest figure recorded since the first quarter of 1975.

However, Rics predicts the fall in house prices will be less severe than that of the early 1990s.

With fewer distressed sellers in the market – those forced to make a sale through financial constraints – supply has remained tight, maintaining prices.

The fundamental shortage of property in the market will also ensure prices do not see a more severe correction.

Chris O'Toole