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Housing affordability has improved so much that prices will bottom out this year and could recover slightly next year according to a new analysis by Lombard street Research (LSR).

The economic research house argues that conventional measures of affordability based on house prices as a multiple of income fail to take in to account the impact of interest rates on the cost of owning a home.  It says that the decline in house prices so far and the substantial cuts in interest rates have: "improved affordability dramatically".

It also argues that, contrary to most forecasts, the UK will fare better during the recession than many other major economies such as Germany and Japan which are more dependent on exports, particularly of manufactured goods. 

LSR's own Housing Affordability Index suggests that property is getting close to being as affordable now as it was in 1997.  The Index compares the cost of a 25 year mortgage at the average standard variable rate mortgage on the average house with average UK disposable income.

It also says that the steep fall in interest rates should limit the number of forced property sales and concludes that: "The scale of forced selling is unlikely to match that in the early 1990s".  In particular, the decline in rates: "Implies little or no payment shock for the two million or so mortgagors coming off short-term fixed rate deals before the end of next year".

But, if prices are more stable and property more affordable than many commentators believe, any recovery in prices next year is going to be limited.  LSR believes that mortgage lending will still be limited, particularly for first time buyers, and that existing household debt will inhibit spending.  "By the end of the year [2010]", it says, "annual house price inflation is expected to be positive but in low single digits".