House prices will fall modestly next year, but that could prove optimistic should the euro zone sovereign debt crisis worsen significantly, a Reuters poll of analysts found.

Already meagre British economic growth will probably slow further in 2012, sapping average national property prices in the process despite a recent up-tick reported in some housing market surveys over the last two months.

The December Reuters poll of 23 economists showed UK house prices slipping by a median 1.7 percent next year, compared with a flat outlook from the last poll in September. Forecasts in the latest poll ranged from a 6.4 percent drop to a 4 percent rise.

Since the last poll, the euro zone crisis has choked off affordable funding for some of Europe's biggest economies like Spain and Italy, spreading fear through money markets and making banks more reluctant to grant mortgages.

With the euro zone most likely already in recession, and a Reuters poll two weeks ago giving a 50-50 chance the UK is as well, it is hard to see what, other than speculation, could drive house prices higher next year.

The biggest risk to the UK housing market, and more generally to the UK economy, is the escalating crisis in the euro zone, said Azad Zangana, economist at Schroders.

If a credit crunch takes place then we could see a return of banks restricting mortgage lending, which would hit house prices.

The European Central Bank lent banks an unprecedented 489 billion euros (408 billion pounds) in the form of ultra-cheap three-year loans on Wednesday, which may go some way to averting a credit crunch in Europe.

Still, the hope of easier lending will do little to counter a profound economic malaise sweeping through Europe in the near-term.

British homeowners have already seen around a fifth wiped off the value of their property since the height of the boom four years ago, compared with more than a third in the United States.


The housing market - the primary generator of wealth for Britons through a 15-year boom that expired three years ago - could be in for a torrid few months.

Fourteen out of the 23 economists surveyed thought house prices would fall further, perhaps by a median 4 percent from here before stabilising.

Forecasts for the size of the drop saw the widest range since the July 2010 poll, showing just how uncertain the outlook is.

We currently see house prices falling by around 5 percent by mid-2012, said Howard Archer, chief UK and European economist at IHS Global Insight.

Indeed, we believe that there are serious downside risks to this forecast and that house prices could well fall by more than 5 percent given the current deteriorating economic situation and outlook.

He said a weakening labour market and increasingly squeezed consumers would bear down on house prices, outweighing the benefit of record low UK interest rates, which economists see on hold at 0.5 percent for the foreseeable future.

Britain's government announced a 400 million pound programme to kickstart a stagnant first-time buyers' market through the use of taxpayer-backed 95-percent mortgages, although it remains to be seen whether this will boost tepid lending figures.

The poll showed monthly mortgage approvals, a good gauge of future housing market activity, at around 50,000 in six months, and nudging up to 54,000 in 12 months.

That was little changed from a poll taken in June, and is less than half the average of 104,000 seen in 2007 before the market crashed.

House prices in London, a property bubble in itself where demand nearly always outstrips supply, should buck the declining trend with growth of 1.5 percent next year, and 2.0 percent in 2013.

Prime central London homes have gained around 1,200 pounds a day in value over the past year, according to property agent Knight Frank taking their average value to 3.2 million pounds ($5 million) in November, thanks to an influx of foreign money.

By contrast, the average British house cost 165,798 pounds in November, according to mortgage lender Nationwide.

On a scale of 1-10, where 1 is extremely cheap and 10 extremely overvalued, economists in the poll gave UK houses a rating of 7 - one notch higher compared with the last four polls.

(Polling by Somya Gupta and Sumanta Dey, Analysis by Snehasish Das in Bangalore; Editing by Toby Chopra)