Scotsman, 18 June 2004
House Prices 'To Fall 20% in Three Years'
By Nicky Burridge, Personal Finance Correspondent, PA News
House prices are set to fall by 20% during the next three years as the booming property market corrects itself, a research group claimed today.
Capital Economics said it expects prices to rise by a further 5% to 6% by the end of this year before beginning to fall at the beginning of 2005.
The group said it thought this gloomy scenario was now the most likely outcome for the market as property had become overvalued.
Ed Stansfield, property economist at Capital Economics, said: "There is an awful lot of variation in opinion about whether and how much prices will fall but our central forecast is that they will fall by 20%.
"The boom has run on for too long and prices are significantly above what is sustainable and we think that when sentiment begins to suffer the most likely outcome is that people will come to realise that prices are too high."
He added that he expected prices to fall regardless of what happens with interest rates and the wider economy.
Capital Economics tends to be bearish about the property market, and first predicted prices would fall by 20% in
2002.
But Mr Stansfield said he did not expect the fall to be as bad as the crash experienced during the early 1990s.
He said then the fall was accompanied by a full blown economic recession, which was not expected this time, and a rise in unemployment had forced a lot of people to sell their homes.
He said this time the fall in prices was likely to be spread evenly over three years and most people would be "completely unaware" of the downturn, and there would not be a sharp rise in mortgage arrears or people defaulting on their loans.
The group expects price falls to be worse in northern regions where it says property looks most overvalued in comparison with earnings, and it is expecting falls of between 25% and 27% in the North, North West and Wales.
It expects prices to fall by around 20% in London and the South East, with lower falls in Scotland and Northern Ireland.
However, Ray Boulger, senior technical manager at Charcol, said: "The further the market goes up the more likely it is that there will be a set back of some sort, but to suggest a set back of anything approaching 20% is way off beam.
"For that we would need to see a dramatic change in our economic situation and a much more dramatic rise in interest rates than anyone is forecasting."
David Page, an economist at Investec, said he expected price growth to slow to zero into next year, before the market entered a period of stagnation.
But he added that the higher prices got, the more one had to worry.
Earlier this week the Governor of the Bank of England, Mervyn King, warned the risk of a house price crash was increasing, saying prices were now "well above what most people would regard as sustainable in the longer term".
However, mortgage lenders were quick to try to reassure homeowners, saying they still thought the market was heading for a gentle slowdown.