The low level of mortgage activity is not only a consequence of slowing demand for houses due to the elevated affordability pressures facing potential house buyers, but also increasingly due to very tight credit conditions leading to markedly fewer and more expensive mortgages being available. Furthermore, potential house buyers now have to provide higher deposit levels, which is a particularly major problem for first-time buyers. 

Meanwhile, muted housing demand, very tight lending conditions, and stretched buyer affordability are likely to continue to feed through to dampen house prices. We expect the Nationwide to report during the week that house prices fell 0.6% month-on-month in April, which would mark a sixth successive decline. As a result, house prices are forecast to be down 0.2% year-on-year in April.

Global Insight expects house prices to fall 7% in 2008 and 8% in 2009. Furthermore, the longer the credit crunch goes on and the deeper and more extended that the U.K. economic slowdown is, the greater the danger will be that an even sharper housing market correction will occur. Current rapidly deteriorating sentiment over the housing market also heightens the risk that prices could fall more sharply over the next couple of years. Consequently, it is very possible that a drop of more than 20% in house prices could occur over the next couple of years.

The Bank of England is also forecast to report on Tuesday that net consumer credit retreated to £1.0 billion in March, after spiking to £2.4 billion in February. The jump in consumer borrowing in February was very surprising, and could have been partly a consequence of people looking to borrow while they can, amid fears that tightening credit conditions will make this increasingly difficult over the coming months. Unsecured borrowing may also have been lifted by people having trouble getting mortgage finance or borrowing less against the value of their home. Finally, there may have been an element of "distressed" borrowing to finance spending, as some people are particularly hard hit by rising utility bills and elevated food prices.

Going forward, we expect that consumer borrowing will be limited by tightening lending conditions, while consumers are likely to increasingly seek to rein in their borrowing. Rising debt levels, low household savings rates, lower equity prices, and higher mortgage rates for a number of people mean that there is an increasing need for many consumers to improve their finances. Furthermore, we suspect that mounting concerns over the economic outlook will cause consumers to look to try to save more. Consequently, an increasing propensity to save seems likely to significantly dampen consumer spending over the coming months.

Meanwhile, we anticipate that the Gfk/NOP consumer confidence index for April (out Wednesday) will show that sentiment deteriorated to its weakest level since the end of 1992. Specifically, we expect the index (which is carried out on behalf of the European Commission) to have retreated to -21 in April, from -19 in March and -4 in August 2007. Consumer sentiment has been buffeted by a series of factors since last August, including the Northern Rock crisis, the credit crunch and financial market turbulence, rising petrol, energy, and food prices, and a number of misfortunes undermining confidence in the government. On top of this, the economy is now clearly faltering, while doom and gloom is mounting over the housing market. These factors are likely to outweigh the support to consumer confidence coming from the Bank of England's third trimming of interest rates in April.

The Gfk/NOP survey is also likely to indicate that people's willingness to make major purchases deteriorated further in April after sinking in March to its lowest level since April 1995. Specifically, this index stood at -21 in March, which was down from +4 in August 2007.

The Confederation of British Industry's distributive trades survey for April (out Tuesday) is expected to add to the evidence that consumer spending is now increasingly faltering in the face of mounting headwinds after a surprisingly resilient start to 2008. Specifically, we expect the balance of retailers reporting that sales were up year-on-year to have fallen to -5% in April. It improved to +1% in March from a 15-month low of -3% in February. Nevertheless, this was still substantially below the long-term average of +18%.

The manufacturing purchasing managers' index (PMI—out on Thursday) is expected to show that manufacturing activity is being hit increasingly by slowing domestic demand, weaker demand in key export markets, elevated energy and commodity prices, and tighter credit conditions. While the weaker pound is providing a very welcome boost to U.K. manufacturers, this is being countered by slowing growth in the Eurozone and probable recession in the United States. Specifically, we forecast the PMI to fall back to 50.5 in April from 51.3 in March. This would be the lowest level since August 2005 and only marginally above the critical 50.0 level that indicates unchanged activity. Nevertheless, the price balances in the manufacturing survey are likely to remain uncomfortably elevated for the Bank of England's liking, as manufacturers try to pass on their markedly higher input costs.

Finally, the construction purchasing managers index (out on Friday) is forecast to retreat to 47.0 in April from 47.2 in March and a peak of 64.8 in August 2007. This would indicate a second successive month of contracting activity. March's contraction in construction activity was largely due to very weak residential activity, and this is likely to have deteriorated further. Indeed, the housebuilding index indicated that activity in the sector contracted for a fourth successive month in March and at the sharpest rate in the survey's history. Housebuilders are now clearly very concerned about the outlook for the housing market, as evidence consistently points to it weakening appreciably in the face of increased affordability pressures and markedly tighter lending conditions.With the commercial property sector in dire straits and the housing market cooling markedly, there is a very real danger that the construction sector could be in for an extended hard time.

 By Howard Archer

During week - Nationwide House Prices, April (Month-on-Month): -0.6%

During week - Nationwide House Prices, April (Year-on-Year): -0.2%

29 April - Bank of England Consumer Credit, March (GBP/Billion): +1.0

29 April - Bank of England Net Lending Secured on Dwellings, March (GBP/Billion): +7.2

29 April - Bank of EnglandNumber of Loan Approvals for House Purchase, March ('000s): 65

29 April - CBI Distributive Trades Reported Volume of Sales, April: -5%

30 April - GfK Consumer Confidence, April: -21

1 May - Manufacturing Purchasing Managers Index, April: 50.5

2 May - Construction Purchasing Managers Index, April: 47.0

During week - Nationwide House Prices, April (Month-on-Month): -0.6%

During week - Nationwide House Prices, April (Year-on-Year): -0.2%