Undersupply could bring back house price inflation

Undersupply in the housing market could lead to a return to rapid house price inflation by 2010, according to a report published today.

Falling output from housebuilders could lead to a 30pc increase in house prices between 2009 and 2012, according to the Centre for Economic and Business Research. The organisation makes its prediction on the proviso that the mortgage market returns to normal by the second half of 2009.

The report states: "The rapidly declining confidence in the housing market is having an impact on building - we expect completions to fall by 20pc in 2008. This will lead to an undersupply of housing over the medium term which will aid recovery in prices."
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However, the consumer and housing prospects report warns that before the housing market returns to growth there is almost certainly more bad news to come. It forecasts house prices will fall 8pc this year and a further 4pc in 2009.

Although the CEBR does not expect unemployment or interest rates to hit the highs of the early 1990s, it does warn that home repossessions are likely to double due to negative house price growth and higher interest rates on mortgages.

The near-paralysis in the housing market means completion of newly-built housing is forecast to fall by 20pc this year with a further fall in 2009.