House prices to fall 30 percent

HOUSE prices could fall by as much as 30 percent over the next four years, it is predicted. That could wipe out all the increases brought by the buying boom since April last year. The thousands of buyers currently risking 100 per cent mortgages and borrowing up to five times their salary could be plunged deep into negative equity.

The warning has extra force because it comes from a respected expert in the field rather than yet another monthly report from a mortgage lender.

Roger Bootle, managing director of Capital Economics, was formerly chief economist at HSBC and one of the Bank of England’s ‘wise men’ who advised Chancellors under the last Tory government.

He said: “The message is clear. Houses are now so over-valued that a prolonged period of falling prices is on the cards.”

Analysts at Capital Economics say it would take a fall of 22 percent to bring the cost of homes back into line with what buyers can afford. A more serious slump, with prices collapsing 30 percent, cannot be ruled out if there is a 1980s-style “boom and bust” cycle.

Some London “hot spots” have already seen prices marked down in recent weeks, which has been attributed to lower city bonuses and Stock Market uncertainties.

But the analysts at Capital Economics suggest that the most serious and widespread effects will not begin to be felt until late next year.

They are forecasting increases of 12 percent in 2003 before falls of 5 percent in 2004, 10 percent in 2005 and 7 percent in 2006.

That would see the average price rising from around £117 000 now to £128 000 by the end of next year, then falling to £102 000 by Christmas 2006.

Such a shift would push thousands of new and recent buyers into trouble — only last week lender Bristol & West unveiled a new mortgage allowing young people to borrow up to 110 percent of a property’s value.

The wider economy would suffer as consumers tightened their belts, spreading the gloom into the High Street and beyond.

There would also be social effects, with young couples locked into small homes without the space to raise children.

Others would find it difficult to move in search of work.

Recent studies indicate that annual price rises are running at around 30 per cent, the highest since the boom of the late 1980s.

But CE argues that homes are now even further out of reach in relation to incomes.

Average house prices are 5,7 times average salaries, above even the 1989 peak of 5,6.

“History tells us that such a high ratio cannot be sustained,” says the firm’s property report. “We should therefore expect a period when house price inflation either slows, or turns negative.”

Capital Economics sets out five scenarios ranging from a benign slowing of the market, which would still be in the doldrums for up to ten years, to the one it expects - sudden collapse and slow recovery.

The forecast echoes the concerns of the Bank of England, which warned recently that the longer the current boom goes on the greater the risk of a “sharp correction”.

Banks and building societies, however, say there is no obvious trigger for price falls.

They point to continuing low interest rates and property shortages as reason for prices to go on rising.

CE suggests a surge in unemployment could be the catalyst. But it argues that no “big bang” would be needed to start a slide.

“All it would take is for households to be unwilling to pay the price asked,” it says.

“In fact, there are already signs that the housing market boom is over in London . . . history suggests that it cannot be long before the rest of the UK follows.”

The latest figures from the property website Rightmove.co.uk show that the asking prices of properties coming on to the market are falling in London and static in many other regions.

The approach of Christmas is inevitably a factor. But the average price in Greater London has fallen back by 3,5 percent in six weeks, to £241 358.

The fall has been led by expensive boroughs such as Kensington and Chelsea where prices are down 14,4 percent over the quarter, or an average of £62 000 Westminster, Camden and Richmond.

The CE study suggests there are many parallels with the last boom and bust although today’s interest rates of 4 percent are very different from the 15 percent of the late Eighties and early Nineties.

The firm puts current house prices at 28 percent above a “fair value” in relation to incomes.

That compares with a figure of 24 percent in 1989.

The last boom fell apart over a two and a half year period, beginning in 1990, when prices crashed 20 percent nationally.