As mortgage criteria tightens, activity on the housing market is deteriorating, forcing house prices to fall and causing the house-building sector to suffer.

The house-building sector is in such a bad way that experts in the City are speculating over the prospect of large companies following in the footsteps of banks and calling on shareholders for extra capital.

UK house-builder Bellway yesterday confirmed the state of the market, blaming a ‘restricted mortgage supply’ for the lack of a ‘normal spring selling surge.’

In the last month house prices have fallen by 2.4 per cent and experts are predicting price drops of as much as 20 per cent by the end of 2008. According to the Royal Institute of Chartered Surveyors (RICS) demand is continuing to weaken, as new buyer enquiries fall further.

“The real issue is the collapse in the number of housing transactions.” said RICS spokesperson Ian Perry earlier this month. “This has very real implications, not just for the property industry but also the high street and wider economy.”

A fall in transactions is what is hitting house-builders like Bellway, which is suffering a fall in net reservations of 31 per cent since February. And due to the low level of activity, the company has been forced to adjust its expectations for July, the statement said:

“Whilst we had anticipated a fall of around 5-10 per cent in the number of homes sold, compared to last years level of 7,638, it is now expected that the fall will be in the range of 10-15 Per cent.

However, Bellway is not the only house-builder facing a bleak future as a result of the current financial climate. Earlier this year big names Taylor Wimpey and Barratt homes both announced significant losses and a potential cut in staff.

Both Taylor Wimpey and Barratt homes are now in debt of more than £1billion, provoking speculation of rights issues where they could ask shareholders to inject more capital at a cut price.

A report from UBS has allegedly supported the rumours claiming that conditions in the market are worse than the first recession of the early 90s. In its report, UBS has reportedly slashed profit estimates for some of the sector’s main players this year, indicating a drop in confidence.

Whilst the housing market continues to deteriorate, David Kuo of Fool.co.uk suggests ways of seeing light at the end of the tunnel for potential buyers: “With house prices expected to fall by 20 per cent this year, the typical home will cost around £160,000 by December. Consequently, buyers are now in a strong position to drive a hard bargain.

“Over the last decade, house buyers have had to dance to the tune of sellers as house prices rose. However, in a buyer’s market, it is he who pays the piper that calls the tune.”

©Fair Investment Company Ltd