BARCLAYS Bank will this week become the first big mortgage lender to warn homeowners that property prices could fall sharply over the next two years — by as much as 20%.

It will tell the City that house prices will drop by about 8% next year, wiping more than £12,000 off the value of the average property, as part of a two-year fall that could see prices drop by a fifth.

“The group view that is now built into Barclays’ plans is that prices will drop by 20% over the next two years,” said Christopher Smallwood, Barclays’ chief economic adviser. “People say that house prices can adjust gradually but I would be very surprised if that happened.”

Smallwood also questioned the Bank of England’s view that house prices could fall without damaging high street spending. The Bank said earlier this month that house prices would fall “modestly” and this would leave consumers unscathed. Barclays’ view is that a drop in the housing market will hit consumer confidence and affect spending.

The warning is significant because it is thought to be the first such prediction from a leading mortgage lender with a vested interest in the property market. Barclays, which owns Woolwich, the former building society, is the country’s fifth largest mortgage lender with loans totalling £62 billion.

Barclays has prepared its analysis of the housing market for a trading statement to be made to the stock market on Thursday. It joins other data producing a growing gloom about house prices.

A survey published by Hometrack, the property information company, found that prices have fallen by 0.6% over the past month with homes in central London, West Sussex and Surrey suffering the biggest drops. Cheshire was the only area to avoid falling prices. This was the fifth successive monthly fall.

“This month’s house price fall confirms, beyond doubt, that the housing boom is well and truly over,” said John Wriglesworth, economist at Hometrack. However, he is not predicting a significant fall in the market next year.

Countrywide, one of Britain’s biggest estate agents, also warned last Friday that house sales had slumped recently as buyers waited to see if prices were falling.

The Royal Institution of Chartered Surveyors (RICS) added to the gloom with a survey of its members showing the largest number of respondents reporting price falls since December 1992.

Jeremy Leaf of the RICS said: “Buyers are still nervous, which is not surprising given the quick-fire interest rate rises over the summer. But the professionals on the ground believe that confidence will not deteriorate further over the coming months as the underlying factors, jobs and the wider economy, remain stable.”

Mortgage lenders have until now remained relatively upbeat with their predictions. Halifax, the country’s biggest lender, recently said that “housing market fundamentals remain sound”. Nationwide, another leading lender, said: “Our view is that over the coming years, house prices are more likely to grow at a very subdued rate rather than fall sharply.”

Both lenders are now preparing their predictions for next year and are expected to forecast low levels of growth during 2005.

Last week executives at other mortgage firms reacted with surprise to Barclays’ prediction. One said: “It is a very odd thing to do as the more weight that is given to the possibility of a market crash, the more likely it is to happen. We thought that Mervyn King (governor of the Bank of England) was trying to pour a little cold water on the market but Barclays’ motive is far less clear.”

The Council of Mortgage Lenders forecasts that prices will rise by 8% next year and sees little cause for concern unless unemployment rises sharply.

Labour party strategists will be keeping a close watch on the market as a sharp fall in house prices in the run-up to a general election could have devastating consequences for the government.

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