House Prices To Come Down In 2008

What is the outlook for property prices in 2008?

The second half of 2007 has seen a slow down in the housing market, and most experts are forecasting a stagnation of even a fall in house prices in 2008. Yet, despite all the signs, the Bank of England said it had been surprised by the sharpness of the downturn and immediately lowered interest rates in early December. Will that help?

Chief economist at Morgan Stanley, David Miles, warns that house prices may drop by 10% in 2008. He says that much of the rise in house prices has been a self-fulfilling prophecy – they’ve gone up because they were expected to go up – but now a fall is coming, and it’s not necessarily a bad thing, as affordability has meant most people now struggle to get into the market.

Capital Economics are forecasting a 3% fall in 2008. The housing downturn has been caused by the five interest rate rises and the fact that property has become too expensive.

The International Monetary Fund even felt compelled to comment, saying that UK house prices were 40% overvalued, leaving them – along with Spain and Ireland – vulnerable to market volatility. House prices in the UK now stand at nine times average earnings – much higher than the five times in 2001.

The HSBC tends to agree with the IMF, reckoning UK house prices to be overvalued by 30%, driven by people buying in the hope of continuing house price inflation.

Falls in house prices are likely to vary by region. London has seen sustained increases for a long period, but could now be in for a fall. Spread betting in the City suggests that a 15% fall in London prices is possible in 2008. Current London average price is £320,000, while the national average is around £195,000, by Halifax figures.

While forecasters and punters are not always right, it is hard to see anything but a ‘correction’ in 2008. Pockets of regional rises may occur, but the overall picture has to be one of a fall in house prices, probably between 3% and 5% across the country