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House prices could crash '30% from 2007 peak'

House prices could crash '30% from 2007 peak'

Wednesday, 23 April 2008 12:00 AM

Property prices in the UK could fall by some 30 per cent from the peak levels recorded in the summer of 2007.

While in January this year mortgage approval figures implied the market could fall by around five per cent year-on-year by the summer, the situation has shown a sharp deterioration of late.

That is according to Richard Woolnough, manager of the M&G Optimal Income Fund.

In Mr Woolnough's view initial estimates were "far too conservative".

Recently released figures from Nationwide show UK house prices have fallen for five consecutive months, while data from HBOS finds the prices fell 2.5 per cent in March, the biggest monthly drop since 1992.

As a result the situation is now perilous.

"History suggests when the UK housing market crashes it tends to fall about 25-30 per cent from peak to trough in real terms," explained Mr Woolnough.

"But given that UK house prices rose about 270 per cent from 1995 to the end of 2007, there is a risk that this crash could be worse."

The comments are in line with those of the IMF, which finds UK property could be overvalued by as much as 30 per cent.

Furthermore, recent data has done little to dispel the growing concern, with the British Banker's Association (BBA) today reporting mortgage approval are at their lowest level since 1997.

"Mortgage approvals are a reliable predictor of UK house prices six or seven months ahead, and current data imply year-on-year falls of between five and ten per cent by early autumn," continued Mr Woolnough.

"I believe this projection is likely to worsen, because the banks are becoming increasingly reluctant to lend, which means mortgage approvals, and therefore house prices, could fall much further."

Worryingly, a house price crash could also spread to the wider economy.

"Due to the leveraged nature of home buying, a housing crash can greatly reduce the spending power of consumers," said Mr Woolnough.

While welcoming the mortgage asset swap plan outlined this week by the Bank of England, the monetary policy committee (MPC) must continue to cut interest rates.

"I believe the only way out is for central banks to slash interest rates in order to encourage borrowing again, which will eventually revive the housing market", concluded Mr Woolnough.

"It's no coincidence that house price crashes result in, or occur at the same time as, recessions."

Chris O'Toole