Knight Frank: House prices to fall 20%

Monday, 21 July 2008 12:00 AM

The average UK house price could fall by 20 per cent from peak to trough during the latest property slump, according to analysis from Knight Frank.

Furthermore, the changes could be even more significant if the overall economic situation deteriorates, unemployment increases drastically and inflation spirals out of control, finds the estate agent.

The findings are part of the organisation's London Residential Review, released today, which shows the much-publicised crisis in the sales market is setting the scene for a boom in the lettings market and professional property investment.

Demand in the letting market has increased by as much as 30 per cent on a year-on-year basis, with rents up by as much as 16 per cent in central London during 2007.

While the credit crunch has not curtailed demand for accommodation, finds Knight Frank, buying an appropriate home is either impossible, as a result of tightened mortgage conditions, or regarded as unwise.

This has seen professional property investors, including sovereign wealth funds, rent property to tenants in the short term - rather than taking a hit on sales.

"There are already signs that, given the current market, developers are opting to retain stock and let it out in the medium-term rather than sell it at discount prices, particularly in more fringe areas that are still being regenerated," explained Liam Bailey, head of residential research at Knight Frank.

"This benefits them in two ways - they do not have to take a hit on profits by selling, and they also gain from the improvements to the area produced by the new scheme, which will only be realised when the market begins to improve."

In the wider sales market, the report notes a continuing difficulty in matching vendor and buyer expectations.

Many owners, after years of rapid growth, have been unable to adjust to the new climate and are refusing to lower prices.

This is producing a blockage in the market, finds Knight Frank.

Meanwhile, there is no sign as yet of the adverse conditions in the mortgage market easing.

The Bank of England is more focussed on tackling inflation than easing the pain in the housing market, and the availability of finance continues to tighten.

Interest rates are likely to remain at five per cent, following three recent holds, with inflation the key target.

Chris O'Toole

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