Warning of further 10% fall in house prices

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by Lin Freestone

It has been predicted by a leading economist that house prices could drop by a further 10% before the market bottoms out.

Talking to an influential committee of MPs on 14 October, David Miles, Visiting Professor of Finance at Imperial College Business School in London, said that the property market should stabilise once house prices lose 20% of their value from the peak of the market in summer 2007.

If he is right, this means that property prices will see a further decline of between 5% and 10%.

The Treasury Select Committee heard from Professor Miles that, if this happens, the number of transactions could pick up again quite sharply.

There is a stand-off between people with a house to sell and people with mortgage credit, and they cannot agree on a price. The reluctance to agree is a result of the belief that prices will slip even further.

These expectations, as well as the frozen mortgage markets, are driving the current trends in the housing market.

However, Professor Miles’s assessment of the market is more optimistic than other experts.

The Treasury Select Committee was also addressed by Professor Muellbauer of Nuffield College. He considers that house prices would need to fall by 25% from their peak in order to have a big impact in bringing first-time buyers back into the market.

Further market disruption is inevitable if his opinion is correct that house price correction is only halfway through its passage.

According to the Halifax, prices are already falling at the fastest rate for 25 years. Knight Frank expects house prices to fall to the same levels as 2003, leaving more than two million people in negative equity.

The Council of Mortgage Lenders predicts that there will be further upward pressure on repossessions in 2009, although it has been pointed out that repossession levels remain low by historical standards.

Fionnuala Earley, Nationwide’s chief economist, has reassured that the increase so far is generally confined to specialist areas of the market, where borrowers were likely to have been more stretched.