Predictions of 20% price fall ‘not realistic’

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A warning that house prices could fall a further 20 per cent in the next couple of years may worry homebuyers with large mortgages who fear getting into negative equity.

The prediction was made by Capital Economics, which first began warning of falling prices in 2006 as the market neared its peak.

In January 2010, it pencilled in a total fall in house prices of 35-40 per cent from the peak, predicting a ten per cent fall in 2010 and five per cent in 2011.

That 2010 prediction, as we now know, proved a bad call. In the event, prices edged slightly upwards, with the economy boosted by quantitative easing – money pumped in by the Bank of England.

Will Capital Economic’s prediction of a year ago be more accurate for 2011 and 2012?

It is looking accurate in its warning that Wales, Scotland, the North West and North East would be vulnerable because the regions rely heavily on public sector jobs, which are now threatened by spending cuts. But many people in the market think the gloom is being overstated for 2011/12.

Ray Boulger, at mortgage brokers John Charcol, says: “Capital Economics has predicted house price falls for about the last eight years, and been proved right in one or two years.

“With earnings currently moving forward by about two per cent per annum, house prices are falling in real terms, measured against inflation, but people don’t consider real prices.”

“I expect prices to drift downwards in the first half and to drift back in the second half for an overall rise of perhaps two per cent. It’s too early to say what happens in 2012.”

Boulger thinks houses might not be overpriced by 20 per cent if measured against total income, rather than largest single income, because many households have several people in work.

There are wide regional variations in the market too.

Katy Waite, local director of County Homesearch, in Surrey, says: “Surrey house prices may suffer a little if interest rates creep back up as threatened this year. On average, they will certainly not drop 20 per cent.”

She added: “If prices do fall they will bounce back quite quickly.”

Carol Peett, West Wales director for County Homesearch, agrees.

“The diversity of the market in West Wales and the strong and steady buyer demand will certainly prevent an overall fall in prices anywhere near 20 per cent,” she says.

Yolande Barnes, head of Savills Residential research team, also expects the market to avoid the worst.

“You actually need very dramatic events, like the 2008 credit crunch, to cut prices by 20 per cent,” she says.

“A rush to sell would have to be followed by a high level of repossessions and lots of distress sales. In fact, some properties have fallen 20 per cent-plus since the peak, but owners are mostly sitting tight and waiting for the recovery.”

Savills says the 2011 market will see high variations.

Barnes thinks former local authority-owned homes which are poorly maintained in depressed areas could “feasibly” fall 20 per cent, while prime and desirable areas and top quality family homes have prices nearly back at the 2007 peak.

“In poorer areas, we think the market could stagnate and prices might fall over a long period, perhaps ten years,” she says.

Stuart Law, at property investment specialist Assetz, says: “As a forecaster, Capital Economics is often wrong by a long way. They are wrong this time because many investor purchasers are already getting an eight per cent yield on investments, outside the M25.”

“If prices fell another 20 per cent from here, yields would top ten per cent and investors would pour in, helping to prop up prices. In the buy-to-let market, we have just had our busiest two months ever in January and February.”

“You have to remember that the really big problem right now is the low level of mortgage lending. I can’t believe that we are currently at the bottom of this particular problem, and that lending must start to ease during 2011.”

If the Capital Economics prediction is correct, it would represent the biggest collapse in house prices since mass owner-occupation lifted off during the 1950s.

The national average house price, says Halifax, is already down from £199,000 to £164,000 since autumn 2007.