Capital predicts two year fall in house prices

Capital Economics, the independent economic forecasting consultancy, is predicting a substantial fall in UK house prices in the next two years.

The analyst believes that prices could drop by thousands, as a result of higher interest rates and the global credit shortage.

In percentage terms, the forecast estimates a 3% fall in prices in 2008, followed by a similar decline in 2009, reducing the average cost of a home by almost £13,000, to £205,000.

In addition, Capital Economics has not ruled out the possibility of a property market crash, similar to that of the 1990s, which resulted in large scale repossession and negative equity.

Currently banks and building societies are revising their lending criteria in response to the global credit squeeze.

This combined with increased interest rates is keeping many potential home buyers out of the housing market, which is likely to result in a fall in prices.

Capital also argues that confidence in the property market has been damaged by the Northern Rock crisis and an increase in repossessions, which have risen 30% in the past 12 months.

The consultancy has taken into account recent house price falls in the US, Ireland, Spain and France, where economic conditions are similar to those of the UK.

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