A story in today’s Telegraph seems to spell out a gloomy prediction for the UK housing market, but it deserves a second look.

The paper quotes LGIM economist Tim Drayson, who has predicted that house prices will “fall another 10pc-15pc next year followed by four to five years of stagnation as incomes catch up with house prices”.

“It will be at least 10 years before we see prices return to their 2007 peak levels,” he said. The crash in prices he is forecasting will take the total fall from the August 2007 peak to 30pc.

Mr Drayson said the long-delayed recovery would be a result of changes in banks’ lending practices. He expects a return to the more conservative practices of the early 1990s, when banks would lend less of a property’s value and on lower multiples of a borrower’s income.  

Three times income used to be considered unusual but banks like Northern Rock were in recent years often lending six times income, justifying the loans by arguing that low interest rates made mortgage costs more affordable.

With rates now at 2pc, and LGIM expecting them to fall to 1pc next year, a relatively small increase could see a homeowner’s monthly interest payment double. Banks have tightened up lending standards so only the most creditworthy, with deposits of close to half a property’s value, qualify for the cheapest rates.

Mr Drayson’s forecast is even gloomier than perennial property market bears Capital Economics, which expects prices to fall 35pc but for the market not to start growing again until 2011. Barclays chief executive John Varley expects prices to fall another 15pc next year while Lloyds TSB chairman Sir Victor Blank is predicting a 10pc decline.

Mr Drayson said that measures taken by the Government and banks, such as the Homeowner Mortgage Support Scheme and delaying repossession orders until borrowers have missed six monthly payments, will only help people remain in their homes during the downturn and not help prop up house prices. He believes the market will only recover as incomes rise.

This is all fair enough and a sensible prediction considering the evidence available. However, it ignores one thing. The recent peak of recent house prices was a bubble and completely unsustainable. The current fall is the market correcting that failure.

It may not be much consolation to homeowners but once the market shocks have left the system, house prices will resemble once again the actual value of the house, rather than a grossly inflated distortion. In the long run this will be good for the market.

More details of the government’s new homeowner mortgage support scheme have been announced by the Treasury after criticisms that the plan showed signs of being put together too quickly and with not enough thought for the consequences. 

The scheme, which may help only about 9,000 homeowners, will be voluntary for lenders, though the eight largest are supporting it “in principle”. No start date has been fixed, but the scheme should begin next year.  

The Treasury has said that some of the practical details are still being worked out.  

The new scheme is aimed at providing a bridge, giving homeowners who are experiencing financial problems sufficient time to find new employment or recover income, without the added concern and stress of potentially losing their home in the interim. For example, homeowners who suffer a big drop in income, and meet numerous criteria, will be able to defer their mortgage interest payments for up to two years.  

The plan follows a series of other initiatives which the government has been bringing forward to stem the rising tide of repossessions of people who can no longer afford their mortgage repayments. The government has been warned that if it does nothing then repossessions may reach 75,000 next year.  

The advantage of the new scheme for anyone eligible is that they will be able to stop repaying interest for two years. However that unpaid interest will be added to the amount they owe, and will then have to be repaid once the borrower can afford to re-start their payments, or when the two-year deferment period has ended, whichever comes first.  

If the borrower finds they still cannot afford their mortgage then the government will pay the lender the “equivalent sum of the total amount of the interest guaranteed that is not recoverable from equity in the property.”  

The main criteria for inclusion in the scheme are that people should ‘have suffered a loss of income from employment or self-employment of a scale which now makes full mortgage payments difficult, but which is not expected to be a permanent loss of income.’ They should ‘have been in dialogue with their lender, including over the use of existing forbearance policies, and have been making some level of regular payment… have taken out a mortgage of up to £400,000…have savings below £16,000…and apply for assistance as owner-occupier.’ This means that the programme will not apply to people with second homes or buy-to-let properties. 

Furthermore, people should ‘not be in receipt of support for mortgage interest or mortgage rescue assistance…have been assessed as being able to pay a certain monthly amount on an ongoing basis…have received financial advice from a party other than their lender to determine their eligibility for the scheme, including testing the long-term sustainability of their financial position, and their ability to resume full payments once their income increases and have fallen into arrears for a number of months during which the lender has exercised forbearance.

Analysts at the website moneysupermarket.com, said the plan was disappointing. “This scheme is virtually worthless and will benefit very, very few homeowners who may be struggling,” they said.  

The list of criteria that must be fulfilled before borrowers are even considered means that few will qualify and even fewer will actually be granted assistance due to the fact it is voluntary on behalf of the lenders, who have only signed up “in principle”.  

If these are the details that have taken so long for the Treasury to produce then it should expect the criticism of this scheme to increase from muted concerns to howls of protest. This is simply not good enough.