Economist warns of 10% drop in house prices

The chief UK economist of Morgan Stanley, the investment bank, has warned that house prices could drop 10% in 2008 and continue to fall in 2009.

The prediction by David Miles could mean that the UK housing market will see its biggest full-year decline since 1969, when records began.

In addition thousands of homeowners may fall into negative equity and repossessions could rise to the levels experienced during the recession of the 1990s.

Mr Miles has based his outlook on the knock-on effects of the five increases in the base rate since August 2006, and the sharp rise in the cost of borrowing caused by the turmoil on the money markets.

Mervyn King, the governor of the Bank of England, recently stated that he expects major banks to continue to experience liquidity problems that will reduce the supply of credit.

Figures for November from Nationwide show house prices falling at the fastest monthly pace for 12 years, and mortgage approvals have fallen to their lowest level since February 2005.

Mr Miles has described his prediction for 2008 as a “central best guess” and adds, “I don’t think house prices falling is in any sense a bad thing … we have a problem of affordability of housing with people struggling to get into the market.”

Property prices have increase three-fold since the early 1990s and a 10% decrease in 2008 would, in real terms, leave prices where they were at the end of 2006/beginning of 2007.

Other house price forecasts for 2008 have come from Capital Economics, the economic forecasting consultancy, which expects a 3% reduction, and Nationwide, which believes prices will remain flat.

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