Liam Halligan
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House prices 'to crash 20pc by 2012' as Budget bites, says Capital Economics
House prices will crash more than 20pc over the next two years as a result of Government
spending cuts, tax rises and a surge in unemployment, according to a leading economic forecaster.
Capital Economics, the consultancy led by Roger Bootle, expects house prices to fall 5pc this year, and 10pc in each of 2011 and 2012. In total, the group predicts a collapse in house prices of 23pc from the start of 2010 – a deeper drop than the 19.3pc crash during the recession.
The numbers imply a torrid second half of 2010 as house prices are currently 3pc higher than the start of the year according to Nationwide Building Society, whose figures Capital Economics is mapping.
"Higher taxes, spending cuts and rising unemployment all point to fresh house price falls this year and next," the forecasters said in a report. "The benefits of low interest rates will be undermined by a fresh tightening in mortgage lending criteria."
It is the second report in less than a week to make grim reading for Britain's homeowners. PwC warned"there is a 70pc chance that UK house prices will still be below peak 2007 levels in 2015 in real terms ... and that real house prices [after inflation] may not regain their previous peak levels until around 2020".
Average house prices peaked at around £187,000 in October 2007 before collapsing for 16 months consecutively, according to Nationwide. The subsequent recovery has left them at £170,111 – 9pc below the top of the boom.
Capital Economics justified its outlook by noting that the house price-to-earnings ratio is still far above its 4pc long-run average at 5.5pc, and stressing that mortgage rates will only get more expensive. It expects "London to be hardest hit by the second leg of the correction". However, it cautioned that the 2012 forecast "is highly uncertain".
The firm's prognosis is based on considerably worse outlook for the economythan the Treasury's. Capital Economics expects the economy to grow just 1pc this year, 1.5pc next and 2pc in 2012, against official forecasts of 1.2pc, 2.3pc and 2.8pc. Unemployment, it added, will rise to 3m after 750,000 public sector job cuts against the official forecasts that unemployment has peaked despite a looming 500,000 civil service cuts.
Are house prices set to fall again?
Hearts would have skipped a beat last week on reports that by 2015 there is a good chance that homes will be worth less than they did in 2007.
Hearts would have skipped a beat last week on reports that by 2015 there is a good chance that homes will be worth less than they did in 2007.
PricewaterhouseCoopers said there is a 70pc chance that British house prices will be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in prices in cash terms - in other words any rise in property prices won't keep pace with inflation.
Even in 2020, after five years of predicted relatively steady growth, the accountants warned there is a 50pc chance that "real" house prices would be below 2007 levels.
John Hawksworth, head of macroeconomics at PwC said: "The possibility of a renewed fall in house prices over the next few years cannot be ruled out as mortgage interest rates start to rise again."
And it all seemed to be going well. The price falls that followed the credit crisis appeared to have bottomed, with prices steadily rising over the past year or so. The stamp duty holiday for homes priced under £250,000 has played its part in the recovery.
But the mood has changed. According to Halifax, average house prices have fallen in each of the past three months. Last week, the Royal Institution of Chartered Surveyors (RICS) added to the woe by revealing that sellers are outnumbering buyers. This is the reverse of last year, when a shortage of sellers helped kick-start a the recovery of the market.
If sellers continue to outnumber buyers there is a strong likelihood that prices, already slipping, will fall further. The RICS survey said that 27pc more chartered surveyors reported a rise rather than a fall in people putting their houses on the market, up from 22pc in May and the highest reading since May 2007 – a few months before the market crashed.
But what do other economists and property experts think? We spoke to a dozen analysts, half expect house prices will be flat over the year, with many reluctant to predict too far ahead. Three expect prices to be up over the calendar year (but flat from hereonin) and three expect prices to fall by between 2pc and 6pc.
Staying flat does not mean these experts are not expecting a fall. Prices have climbed 6pc since January, which means that when experts say they expect prices to stay flat over the year, they are actually saying that prices will fall from here back to 0pc.
Howard Archer at IHS Global Insight said: "House prices are likely to be erratic over the coming months and will probably be only flat over the rest of 2010. It is hard at this stage to be optimistic about prices in 2011, as the fiscal squeeze will kick in, which will hit people's pockets and lead to job losses in the public sector."
House price forecasts are headline grabbers – but forecasters do get it wrong. For example, in the autumn 1990, an economic adviser at Abbey said: "We anticipate a modest recovery next year, or at least a positive growth in house prices.'' Prices went on to fall in four of the next five years.
In 2004, many experts were forecasting a property crash claiming house prices had risen to unsustainable levels. But prices rose 15pc in 2005, almost twice the annual average of the previous 20 years.
At the start of 2009, Assetz, the eternal property bull, thought prices would rise 17.3pc that year, while long-time property bear Roger Bootle, from Capital Economics, predicted they would fall a further 20pc, leaving them about 35pc below their peak – but average prices rose 5.9pc according to the Nationwide House Price Index.
Yet, not one of the dozen experts we contacted this week believes that prices will rise during the second half of the year, with unemployment set to rise once public sector spending cuts get into full swing.
For many would-be sellers, it seems a bigger gamble to hold off in the hope that the market will continue to improve, than to sell now given the recovery in house prices and an improvement in the mortgage market.
And for those looking to remortgage, now could be the optimum time. The mortgage market is recovering from the credit crunch. Fixed rates have been falling (they are now close to seven-year lows) and lenders have been relaxing criteria so even those with a 5pc deposit can now get a loan.
But, as we report on page 2, new proposed affordability tests could make it harder for people to get the size of mortgage they expect, while this month the Bank of England warned mortgages would be harder to obtain in the next three months amid fears of a "deterioration in the economic outlook".
In short, this could be as healthy as the housing and mortgage markets get for quite a while.
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