House prices 'will stagnate but not fall sharply'

Emma Dandy
Monday 12 August 2002 00:00 BST
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The current house price boom is an unsustainable bubble, economists from Cambridge Econometrics will warn today. But the influential think-tank says prices are likely to stagnate over the next decade rather than drop substantially, unless interest rates rise sharply or the Government substantially changes its policy on new housing.

"UK house prices are going through their fourth boom in 30 years, nearly doubling since 1996 for the UK as a whole and two and a half times their level in 1996 for London," the think-tank says in its latest Regional Economic Prospects report.

Cambridge says the boom is mainly a southern England phenomenon with the price bubble rippling out from London. Prices in London, it says, are an average of five times London incomes, compared with the long-term average of four times.

The rising trend in house price to income ratios in the South lies in the continuing housing imbalance – with demand outstripping supply – but that in itself, Cambridge says, is not enough to sustain the speculative bubble. "If, as we expect, regional house price to income ratios return to close to their historical trend over the next decade, this will mean a substantial downwards adjustment in the current ratios in the South, especially for the over-valued London market," it says.

The predictions follow recent evidence that the housing boom has peaked. The mortgage bank Halifax revealed last week that the average price of a home rose by 1.9 per cent in July, marking the second month of slowdown and less than half the pace of the record peak of 4.3 per cent growth in May. The month-on-month growth figures took annual house-price inflation for the year to the end of July to 20.8 per cent – its highest level since June 1989. Recent figures from the Royal Institution of Chartered Surveyors showed a marked fall in new enquiries and Inland Revenue figures have reported a fall in the number of completed transactions.

There has also been anecdotal evidence of lower levels of enquiries and transactions that also point to a slowdown in activity.

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