Bank of America predicts UK house price slump

A leading economist at the Bank of America has warned that there is a one in five chance of a recession in UK house prices over the next two years.

Matthew Sharratt believes that house prices could fall by as much as 10% in the 18 months from the beginning of 2008, with the sharpest drops likely to be seen outside London.

He sees the buy-to-let market as particularly vulnerable because prices relative to rents have increased to what could be considered an unsustainable 60% above their long-term average.

This view is supported in a recent survey by the Royal Institution of Chartered Surveyors showing that over 5% of landlords chose to sell their properties when tenants’ leases expired in April.

Mr Sharratt is not alone in expressing fears that the Bank of England’s succession of base rate rises could put increasing pressure on buy-to-let investors, which in its turn could cause a slowdown in the entire housing market.

According to Bank of America’s models, UK house prices are currently 20% overvalued and the predicted price recession during 2008/09 will be followed by very subdued house price inflation until 2010.

Whilst leading UK lenders, such as the Halifax and Nationwide are reporting prices rising at double-digit rates, a number of warnings signs are evident; the Royal Institution of Chartered Surveyors has reported that in June house prices rose at their weakest rate since the start of 2006.

Furthermore, only last week Barratt Developments said that it expected higher interest rates to hamper activity while Bovis Homes reported a sharp drop in reservations.

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