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UK Housing Prices Will Not Plunge: Item Club

The liquidity squeeze which has affected the global financial markets in the past three months is not likely to cause a correction in the UK housing market, Peter Spencer, chief economic advisor for Ernst & Young's Item Club, told CNBC's "Squawk Box Europe" Monday.

The IMF warned last week that the UK is facing a sharp fall in housing prices, which have been rising faster than salaries.

The Fund said the UK real estate is showing similar characteristics to that of the US and banks became less willing to lend following the credit crunch.

"The momentum, particularly in the UK economy, is quite phenomenal at the moment, we're going to take a long time to lose that momentum," Spencer said.

Spencer's bullish view is based on the Ernst & Young ITEM Club Autumn report, which also says that while house prices may stall in 2008, the fundamentals remain strong.

Rate Cuts Needed

But the report projections rely heavily on the assumption that the Bank of England will lower interest rates, a move which is not guaranteed because of persistent inflation concerns.

However, Spencer said the UK economy is in much better shape currently than during the housing crisis in the late 80s-early 90s, when interest rates were as high as 15 percent and unemployment was soaring.

"The fact is, inflation is under wraps and the bank can cut interest rates … it will eventually cut rates to keep things going," Spencer said.

But the credit crunch has started to have a tightening effect already, said Louise Cuming, head of mortgages at moneysupermarket.com.

"The concerns over funding have meant that the riskier lending is just getting harder or even impossible for lenders to borrow for, so they're moving out of those products and that has an effect of constricting the market place," Cuming told CNBC Europe.