Despite a 10 to 30 percent drop in property prices since 2008, Government said it’s unlikely the Bermuda housing market has hit bottom and this could challenge Bermuda’s banks in the coming months.This was one of several concerns raised in the National Economic Report outlook for 2012, which expects the economy to shrink a further 1 to 2 percent this year.“Real estate prices have declined sharply but have not bottomed,” the report released Friday stated.“Households are highly indebted and thus vulnerable to further declines in housing prices.“Given the banking sector’s large exposure to real estate, deterioration in asset quality would render existing loan loss provisions insufficient.“Moreover, weaker demand for loans, high levels of non-performing loans, plus the intensifying competition for deposits are likely to dent banks’ earnings/capital formation.”The report further stated: “The increasingly adverse economic conditions and the intensification of the decline in real estate prices on both the residential and commercial sector will further challenge the credit fundamentals of the domestic banking sector.”Coldwell Banker Bermuda Realty earlier this month said house and condo prices in Bermuda had plunged asmuch as 10 to 30 percent in the last four years.The report also gave its outlook on other areas of the economy, including the (re) insurance industry.Reinsurance Sector“The (re) insurance sector, as the key driver of the current account surplus, has remained well-capitalised in spite of a near record-level of catastrophe losses in 2011, and fundamentals appears to be still strong, but there are short-term challenges.”The report said (re) insurers’ profitability is likely to come under pressure by the slow economic recovery, record low interest rates and a reduction in reserve releases.“The impact of the trend of an increasing frequency of catastrophes, attributed to climate change, has been largely offset by excess capacity and the lack of industry consolidation, leading to only very moderate premium hardening in certain classes of business.”The report said that while the outlook for 2012 remains negative, “proposed reform measures in the areas of labour market, fiscal stability and the continued resilience of the international business sector can have an important and positive impact on Bermuda’s growth outlook beyond 2012.”Also, the 2012 report said, “Plans to liberalise immigration policy in association with foreign direct investment will also have a positive impact on growth prospects.“These measures combined with sustained growth from Bermuda’s largest trading partner, the United States, should contribute to a mild recovery in Bermuda’s economy leading to positive but still historically weak growth in years 2012 and 2014.”Government said the National Economic Report for 2012 was compiled with the assistance of the Bermuda Monetary Authority, the Bermuda Hotel Association, Registrar of Companies, Statistics Department, Tourism and Brimmer & Company.