The housing market should bottom out in the coming 12 months, and by the end of the year prices could start to rise again, according to new research.

Affordability in UK housing has improved dramatically over the past year, meaning the property market could recover sooner than most economists expect.

The finding, from Lombard Street Research (LSR), contrasts markedly with the consensus City view, which is that house prices will fall by another 10 per cent – 15 per cent this year, taking their total fall during the current crash to over 30 per cent.

In fact, the LSR/Daily Telegraph housing affordability index shows that house prices are now moving back into affordable territory. The index rose from 93.1 points to 96.1 points in the third quarter of last year. According to LSR experts, it is now likely to be close to, or even above, 100 points, which signifies the average housing value over the last 50 years.

The indicator, which compares house prices to other financial factors, including earnings and mortgage rates, implies that those now buying a house are doing so at about its fair value.

‘If you can get access to a mortgage, have managed to keep hold of your job and have a decent deposit for your mortgage, the affordability situation has improved greatly in the last year,’ said LSR’s Jamie Dannhauser. ‘There are actual signs from the market that things are improving. There’s no reason why you couldn’t have a month by the end of the year where prices go up by 0.1pc.’

However, the LSR’s affordability indicator does not take into account the credit rationing by UK banks due to the financial crisis. Mr Dannhauser also warned that unless the Government and Bank of England Embark on quantitative easing soon, it could provoke an even more dramatic fall in prices.

The Daily Telegraph Monday 19 January 2009