In addition, Hometrack has predicted that arrears and losses in sub-prime market likely to exceed current expectations.
House prices are tipped to continue to rise in 2008, although on a much slower scale than we have seen in the past.
Weaker market sentiment, stretched affordability levels and changes in the lending sector are all cited as factors which will result in this pronounced market slowdown.
Gary Styles, Hometack's strategy, risk and economics director, said: "A combination of slowing mortgage demand and tightening credit standards are expected to result in an 18 per cent decline in net mortgage lending in 2008.
"There will be a continued flight to quality by mortgage lenders but arrears and losses in the 'sub-prime' market are likely to be greater than currently anticipated as certain types of borrower struggle to re-mortgage."
"Higher perceived lending risks and more limited access to some sources of funding are encouraging lenders to focus on quality rather than volume driven market share. Lenders are returning their attention to the traditional prime mortgage market for future growth and development."
Hometrack has said that it believes arrears and losses in the adverse credit market (lending to those with County Court Judgements and arrears histories) will be much higher than expected.
Styles said that the market will become more fragmented: "Higher mortgage interest rates and a move towards wider margins will place vulnerable consumers at the risk of more serious arrears and of property repossession. Lenders will need to look at the potential impact of more extreme events on their lending businesses, particularly those in the more vulnerable non-prime sectors.
"In the short-term, the risks are on the downside driven by declining house price expectations, higher mortgage rates and reduced mortgage supply. However, the risks around the medium term outlook are far more evenly balanced with lower interest rates, intense competition in the prime market and a structural shortage of housing supply, all positive drivers for the market."
