House prices could fall by almost a third in three years

01 May 2008 / by Rebecca Sargent
House prices could continue to fall by more than 30 per cent over the next two or three years, according to a member of the Bank of England's Monetary Policy Committee (MPC), David Blanchflower.

Mr Blanchflower, speaking in Edinburgh on Tuesday, argued that the house price to earnings ratio needs to come down, in line with the International Monetary Fund's (IMF) projections last month that the UK is vulnerable to house price declines.

According to the IMF, UK house prices currently stand at 30 per cent higher than is justified by fundamentals, implying that UK house prices have room for manoeuvre.

The predictions from Mr Blanchflower coincide with the latest Nationwide House Price Survey which saw a drop in house prices of 1.1 per cent for April, making the annual house price change -1.0 per cent, the first annual fall since the housing crash twelve years ago.

As the credit crisis continues well into the second quarter of 2008, activity in the housing market is decreasing and mortgage rates and fees are rising. According to the Royal Institute of Chartered Surveyors' (RICS) chief economist, Simon Rubinsohn, the housing crisis is not yet as bad as the slump in the 1990s, despite the turmoil. He said:

"The scaling back of loan to value ratio by lenders is depressing turnover in the market and is making it particularly difficult for first time buyers to take their first step on to the property ladder. However, the level of buyer enquiries is still more consistent with the 2004/5 experience rather than the collapse in the market in the early 1990s."

However, according to mortgage experts John Charcol, house prices are set to fall even more because they are a direct result of the poor availability of mortgage funding. Charcol's Katie Tucker said: "Mortgage approvals of all types are now a quarter less than this time last year. New house purchase mortgage approvals specifically are down a daunting 44 per cent year on year, and these lost movers are the first time buyers with small deposits."

The Government has recently launched its Special Liquidity Scheme in attempts to restore faith and boost inter-bank lending; however, it is thought that the effects will not reach the housing market in the near future. Nationwide's chief economist, Fionnuala Earley, said: "The scheme is unlikely to mean that house prices and mortgage lending will return to levels seen at this time last year.

"Weakening housing market sentiment and demand, unrelated to the financial market turmoil, will mean that we should expect slower market conditions. However, the Bank's measures should help to restore a more orderly transition and ultimately bring about a more stable market." she said.

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