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Market due 'severe' adjustment

2 April, 2008

In the report, 'European Economic Forecast: Major Corrections On The Cards As Housing Markets Turn Down,' Standard & Poor's chief European economist Jean-Michel Six said that the necessary market correction in both the UK and Spain would be both 'severe and painful.'

It has predicted a major slowdown in the UK housing market, brought about by sharply deteriorating affordability, scarce funding and a corresponding economic slowdown.

The firm's calculations demonstrated that prices would have to drop by 27 per cent before the UK affordability ratio to returned to its long-term average of 2.5 times income, last seen at the beginning of the 21st century.

Ironically, Standard & Poor's says that a correction of this magnitude 'is close to the peak-to-trough fall in house prices expected in the US'.

The report forecasts house price growth to remain flat or slightly negative this year, with a 'modest' increase of 4 per cent in 2009.

The Spanish market is also forecast to see a marked slowdown as a result of the growth explosion of recent years, an assertion supported by data from Spanish statistical office INE - the latest showing that annual sales are down 27 per cent, with permits for new residential housing (a necessary requirement for construction) slumping by 40.6 per cent.

Six added: "It seems likely that housing investment will experience a major cutback in the next 12 to 18 months - we expect house price inflation to turn negative this year and in 2009, in a 0 per cent to negative 5 per cent range each year."

Elsewhere in the EU, the French housing market was deemed to be 'benign' in the medium term by the report.