Property prices to fall 10% next year

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by Kay Murchie

Morgan Stanley’s chief UK economist, David Miles, has warned that property prices will drop 10% next year.

This would result in the biggest full-year decline since records began in 1969. This type of decline could mean thousands of people will be in negative equity (where a borrower owns more on their mortgage than the house is worth).

Mr Miles, one of the country’s leading experts, said the problems would not end there, as prices could continue to decline in 2009.

The anticipated slump will be caused by the turbulence in the credit markets which is resulting in significant increases in the cost of borrowing and 5 Bank of England interest rate rises.

Widespread property falls have already been noted in the US with economists there fearing a recession.

The latest UK figures bear out a picture of slumping property demand. Last month, property prices fell at the quickest rate since 1995 and mortgage approvals fell to the lowest level for over 2 years.

Mr Miles said his forecast for 2008 was a ‘central best guess’ based on positions taken by traders in the financial markets.

However, he added I don’t think house prices falling is a bad thing. There’s a natural tendency for people to view it as bad for the economy, as unhealthy. That isn’t right, we have a problem of affordability of housing with people struggling to get onto the property ladder.

Since the early 1990’s, property prices have trebled. There have been many reports by other property experts warning of major falls with some predicting a crash.

Acting Liberal Democrat leader Vince Cable and former economist said, the market is very, very, very vulnerable. Mr Cable laid much of the blame on ‘irresponsible’ lenders handing out ‘ludicrous’ mortgages at up to six times income.

Mr Cable concluded that a downturn in property prices could see many families fall into a negative equity trap, struggling to pay their mortgages and facing repossession.