Forecast For Ten Percent Fall In House Prices

What constitutes a house price crash? If it is a fall of 10% in one year then 2008 could see that crash.

Morgan Stanley’s chief UK economist David Miles has forecast that prices will fall by a tenth of their value next year, which would be the biggest fall ever recorded since records were first taken in 1969. Such a drop could leave many thousands of homeowners in negative equity, bringing back the dreadful days of recession of the early 1990s.

The pain might not end next year, continued Mr Miles - a some time advisor on mortgages to Gordon Brown - also warning that the fall could continue into 2009. The Prime Minister would find this another major blow to his premiership, having spent ten years as Chancellor with economic stability and prosperity.

Five bank rate rises, the US sub-prime crisis, Northern Rock and the credit crunch have brought about a decline in consumer confidence and people are backing away from housing transactions. Mervyn King, Governor of the Bank of England, has also warned that there may be a shortage of mortgage cash in 2008.

On the other side of the Atlantic the United States have already seen a sharp downturn in property values, with a recession a distinct possibility. In the UK  in November house prices fell at their greatest rate for 12 years, according to Nationwide figures, and mortgage approvals were at their lowest level for two and a half years.

Mr Miles said his forecast was a best guess, and added: “I don’t think house prices falling is in any sense a bad thing. There’s a natural tendency for people to view it as bad for the economy, as unhealthy. But I don’t think that’s right. We have a problem of affordability of housing with people struggling to get into the market. It sounds like a big number, but if house prices fell 10% in real terms that would take them back to where they were at the end of last year, or even the beginning of this year. It was impossible for house prices to continue to rise at the average rates we have seen.”