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Capital Economics: House prices to crash 20%

Monday, 21 April 2008 12:18 PM

Capital Economics has revised its expectations over the future direction of house prices, and now argues prices could fall by 20 per cent.

The macroeconomic research consultancy has downgraded its expectations for this year, and now thinks prices could fall by as much as eight per cent.

This will be followed by a ten per cent drop in 2009, which, when dip in price seen in the final months of 2007 are taken into account, means property prices will end next year roughly 20 per cent lower than their 2007 peak.

The worsening situation and delays in reporting market trends have led the organisation to reevaluate its predictions.

"For a start, because of the long lags in the house buying process, house price data based on mortgage approvals reflect decisions made several weeks, or even months, earlier," said Ed Stansfield, property economist at Capital Economics, in a housing market update.

"Thus the data will not yet be fully reflecting the impact of the tightening in lending standards that we have seen this year, nor the recent falls in consumer confidence."

Both Nationwide and Halifax have reported sustained falls in property values, while the Royal Institution of Chartered Surveyors (Rics) reports sentiment in the property market has fallen to an all time low.

Global Economics has also reviewed its forecasts for economic growth in the UK economy.

The organisation now expects GDP growth of 1.7 per cent in 2008 and just one per cent in 2009 - with the previous figures of two per cent and 1.7 per cent discarded.

There is also little confidence today's moves by the Bank of England will bolster the market.

"The Bank of England's Special Liquidity Scheme will ease mortgage funding concerns somewhat, but there is no guarantee that increasingly risk-averse lenders will again loosen lending criteria materially," said Capital Economics.

"And similar moves in the US and Europe have not succeeded in freeing up the important inter-bank market. So we do not see today's move preventing further house price falls."

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