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Economist predicts "sharp fall" in house prices

Wednesday, 22 November 2006 12:00 AM

It is quite likely there will be a "significant fall in real house prices" within the next two years, a leading economist says in a report published today.

Research by Morgan Stanley states significant falls are needed relatively soon for house prices to match demand and supply.

The report, which questions how sustainable current house prices are, says predicting house price drops is very difficult, but anticipates prices coming down after another year or so of rises.

Speaking on the BBC's Today programme, David Miles of Morgan Stanley said: "I think there's a tendency in the housing market for people quite understandably, in thinking about where house prices are going, to look at recent history.

"If people do that of course it will add in some sense a destabilising factor to this market, because if prices have gone up sharply and people think that means they will continue to go up, then they'll find buying houses very attractive because of the capital gain they expect to get."

Mr Miles added: "It also means that if you then go through a period where house price inflation, having been high, falls a bit, that will mean that people's expectations will themselves get ratcheted down a little bit, and that will make buying houses at very high prices seem less attractive."

The report states the predicted drop in prices is not likely to affect the property market in a way that could lead to a crash.

"Most people live in the house that they own. If an owner is preparing to trade up, i.e. move to a bigger house (as many are), national house price rises do not make that household better off."

The report added: "Those who trade down may gain from house price rises and those who trade up lose; these winners and losers should largely cancel each other out across the aggregate economy."

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