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House prices to drop 15 per cent

07 July 2004
UK house prices are likely to fall between ten and 15 per cent over the next five years - but there will be no market crash, a new survey claims.

Accountants PricewaterhouseCoopers predicts that the average price of £150,000 will drop £22,500 over the next five years.

PwC said that house prices are currently massively overvalued compared with earnings and rising interest rates are likely to lead to a slowdown in the market. However, the firm stressed that price falls would not be as severe as the early 1990s and were unlikely to spark a recession.

"House prices do seem overvalued though part of this is explicable by lower real interest rates and supply shortages. Based on our analysis of evidence from previous housing market cycles, prices could decline by around 10 per cent to 15 per cent in cash terms," said John Hawksworth, head of macroeconomics at PWC.

PwC added that the consequences of a sustained and substantial fall in house prices could be catastrophic for first-time buyers who had taken out 100 per cent interest-only mortgages and the UK could see increasing bankruptcy rates and negative equity returning in some regions as Britons continue to take on more and more personal debt.

PwC predicts that any fall in house prices might reduce consumer spending by about 1.5 per cent to 2.5 per cent over the next few years, while the impact on economic growth would be less marked.