“This brings the annual rate of fall over the last twelve months to 15.9%.
“However the three-month on three-month rate, which smoothes the volatility often seen in the monthly numbers, shows a fall of only 4.2% in December. This is its slowest pace since May 2008. The price of a typical house is now £153,048, around the same level as of spring 2005, but still over £17,500 more than five years ago.
“2008 has been a year of turmoil in the UK housing market. The disruption in the financial markets worsened throughout 2008 and had larger implications for the real economy than we anticipated a year ago. This time last year we expected the housing market to cool quickly as affordability was poor and economic conditions looked set
to weaken, but we did not anticipate the speed of house price falls or the extent of the global and domestic economic slowdown.
“While we underestimated the speed and size of the fall, with the benefit of hindsight, the path of prices in 2008 is understandable. Three main factors have been behind the sharp fall in prices: credit conditions, expectations and affordability.
“Even in 2007 it was clear that affordability was beginning to act as a brake on activity and on the rate of house price growth in the market. The reduced access to credit resulting from wholesale market turmoil provided a catalyst for further declines in housing market activity. Finally, a combination of the initial price falls, widespread reports of financial market turbulence and the slowdown in the real economy prompted households to expect further price declines. As house price expectations turned negative, the incentive to enter the market evaporated and buyer demand fell accordingly.
“As a result, housing market activity plunged to the lowest levels ever recorded and house prices fell sharply.”
As for the next 12 months, Ms Earley said: “Conditions remain highly volatile going into 2009, making it more difficult than usual to arrive at a specific forecast for house prices. In these unsettled times a forecast subject to frequent change could itself add to greater uncertainty.
“However the outlook for the economy, and consequently the housing market, can be described in more general terms. The UK and various other economies slipped into recession in the final quarter of 2008 and there is little sign that this trend will be reversed in 2009. These conditions have already prompted the MPC to cut the base
rate by 3.5 percentage points, and are likely to lead to further falls in 2009 in an effort to prevent a deeper recession. It looks like 2009 will be a bumpy year for the UK economy.”
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