In a special report released today, Ernst & Young said the current stabilisation in the housing market was a false dawn. It said the recent rise in house prices cannot be sustained beyond the spring of 2010 and prices may stagnate for the next two years, before picking up again gradually from 2011 as the wider economy strengthens and credit conditions ease.

Hetal Mehta, senior economic advisor to the Ernst & Young ITEM Club, said: “Price rises largely reflect the acute shortage of available properties, with many homeowners either trapped in negative equity or reluctant to sell for fear of locking in the losses of the past two years. A small number of cash-rich buyers have supported prices, but the supply of these funds is limited, which means prices are likely to dip again in the first half of next year.”

She added that it would be difficult to make a case for a sustained pickup in prices without a recovery in mortgage lending.

“This would still appear to be some way off. Banks are continuing to restrict the amount of money that they are willing to lend, with them looking to strengthen, rather than expand, their balance sheets.”

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, commented that the combination of rising joblessness and weak earnings growth would hold back a recovery.

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He added: “The threat of unemployment encourages consumers to save more and to pay down debt, rather than add to their existing burden. The uncertainty also discourages consumers from committing to big decisions such as buying a house. The weakness of earnings growth has also meant that, despite the sharp drop in house prices, affordability has not improved to any great extent.”