House prices 'could fall by 10 per cent this year'

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The Independent Online

One of the Government's most distinguished advisers on housing policy, Professor David Miles, has suggested that house prices could fall by 10 per cent this year, and leave more than a million householders in negative equity.

Professor Miles, who has authored reports for the Treasury into the future of the housing market, said that his “central projection” was subject to a high degree of uncertainty, but was based on an extensive reading of the behaviour of the housing market in recent history. Speaking at a seminar organised by the National Institute for Economic and Social Research, he said the recent rise in real estate values could not be entirely justified in terms of the “fundamentals” - incomes, demographics, interest rates and supply. If such a fall in prices were to occur, Professor Miles said, it would wipe around 1 percentage point off the growth rate.

That would have a noticeable impact on living standards and the public finances, but he added, “my own estimate is that that is nowhere serious enough to cause a recession”. However, he added that should house prices fall by more, and consumption be affected even more severely than thought, then a 3 per cent reduction in growth in a “bear case” was possible. Professor Miles indicated that , with a 15 per cent fall in real property prices, taking account inflation at about 3 to 4 per cent, some 1.2 million householders would find themselves in negative equity, though he stressed that many they might only be “dipping” into territory where the value of their mortgage exceeds the value of their home. A fall of a fifth in house prices between the beginning of 2008 and the end of 2009 would only take prices, on average, back to where they stood in 2006.

House prices have already fallen for six months with a drop of 7 per cent from their peak. Halifax bank recently suggested they could decline by 7 per cent this year. The most pessimistic observers put the prospective crash at 30 per cent or more. The effects on the wider economy are hotly debated among economists. As transactions levels have decelerated to close to half where they were last year, purchases of household good such as furniture and appliances have obviously been affected. Homeowners may also feel poorer and will be less able to draw equity from their homes at a time of falling prices and generally tightening credit conditions. Professor Miles is chief economist and managing director of Morgan Stanley Research.