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UK house prices could fall by 33%

Wednesday, 30 April 2008 8:30 AM

Average house prices in the UK could fall by a third, a member of the Bank of England's monetary policy committee (MPC) said last night.

Furthermore, the UK faces the real threat of recession.

David Blanchflower, in a speech last night to the Royal Society in Edinburgh, said the credit crunch was now hitting the UK hard.

He added price falls were necessary as house prices have risen to hastily ahead of income growth.

"In my view a correction of approximately one third in house prices does not seem implausible in the UK over a period of two or three years if house price to-earnings ratios are to be restored to more sustainable levels," he said.

He added this house price fall would bring homes down to four times earning from the current levels of six times earnings.

Mr Blanchflower added this prediction were in line with International Monetary Fund (IMF) reports, which suggest that UK property is 30 per cent overvalued.

"I am not suggesting that such a drop will necessarily occur, but it may. Cutting interest rates now may help to prevent such a dramatic fall."

Today housing news took a turn for the worst with Nationwide reporting a one per cent annual fall in house prices - the first quantum of deflation in 12 years.

Mr Blanchflower added house price falls are now hitting consumer spending.

Furthermore, while employment seems to be currently holding up, total hours worked in the last quarter of 2007 fell, and demand for labour is now slackening, the MPC member said.

Total job losses in the City are expected to hit 40,000, he added.

"I believe we face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occurring," Mr Blanchflower said.

"For some time now I have been gloomy about prospects in the United States, which now seems clearly to be in recession. I believe there are a number of similarities between the UK and the United States which suggest that in the UK we are also going to see a substantial decline in growth, a pick-up in unemployment, little if any growth in real wages, declining consumption growth driven primarily by significant declines in house prices.

"The credit crunch is starting to hit and hit hard."

Daniel Barnes

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