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10 October 2007

House prices likely to fall in next 2 years

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by Kay Mitchell

House prices likely to fall in next 2 years

Economists from Capital Economics have claimed that property prices are likely to fall in the next 2 years, wiping thousands of pounds off prices. They believe higher interest rates and the turmoil in the credit markets will trigger a property market squeeze.

It is anticipated that house prices will drop by 3% next year and by the same amount in 2009, taking the average cost of a home down by almost £13,000 to £205,000.

Furthermore, Capital Economics are not ruling out a repeat of the 1990s crash that ruined thousands of buyers who were repossessed or owed more on their homes than they were worth.

Falls in property prices have been noted in France, Ireland, Spain and the USA and Capital Economics believes this will be repeated in the UK.

Banks and building societies are drastically redrawing their lending rules following the credit squeeze. Mortgage rates have been raised and a tightening of lending has been implemented. The combined effect has forced potential buyers out of the housing market and according to Capital Economics, this will feed through to a decline in prices.

Furthermore, confidence has been knocked by the Northern Rock crisis and a rise in home repossessions, which are 30% up compared with 12 months ago. This will bring some properties on to the market at a reduced price, which is likely to depress values.

An economist at Capital said the credit crunch in financial markets points to both a tightening of mortgage lending criteria and a weaker London market. Consequently these factors have boosted the chance that UK house prices may be the next to fall.

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