UK house prices will not reach their autumn 2007 peaks for at least another five years, according to the Ernst & Young ITEM Club.

In a special report the forecasters said that while data is showing that the housing market is now beginning to stabilise, the recent rise in house prices cannot be sustained beyond the spring of 2010.

With the UK having one of the highest rates of home ownership in the world the housing market has always been central to the prospects for the domestic economy.

The decade from 1996 saw a sustained boom in the values of properties across the UK, but the onset of the global financial crisis have seen prices fall in excess of 20% from their peak in the autumn of 2007.

Hetal Mehta, Senior Economic Advisor to the Ernst & Young ITEM Club explained: "ITEM believes the current stabilisation in the housing market is a false-dawn. Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years. A small number of cash-rich buyers have supported prices, but the supply of these funds is limited, which means prices are likely to dip again in the first half of next year.

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"Mortgage lending remains depressed and with 56% of owner occupiers having a mortgage, it would be difficult to make a case for a sustained pickup in prices without a recovery in mortgage lending. However, this would still appear to be some way off. Banks are continuing to restrict the amount of money that they are willing to lend, with them looking to strengthen, rather than expand, their balance sheets."

ITEM suggests that prices are likely to stagnate for the next two years, before picking up again gradually from 2011 as the wider economy strengthens and credit conditions ease. But it will take more than five years for prices to return to their late-2007 peaks.

Andrew Goodwin, Senior Economic Advisor to the Ernst & Young ITEM Club said: "In order for the housing market to function properly it is essential that first-time buyers are bought back into the market, else the current status quo of a low number of transactions, dominated by speculative cash buyers, is likely to be maintained."

Passing on larger portions of the current low interest rate into mortgage rates would help. But despite sharp falls in Libor, the cost of a mortgage remains high, with very few attractive deals available for new mortgages and remortgaging both in terms of tracker and fixed rate mortgages.

(CD/BMcC)