Blanchflower warns prices may drop 15%
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House prices will fall by up to 15% over the next couple of years, a leading economist has warned.
David Blanchflower, former member of the Monetary Policy Committee and professor of economics at Dartmouth College in the US, says with little growth in employment and wages, the house price-to-earnings ratio needs to even out, suggesting a fall of 10% to 15%.
Blanchflower, speaking at the British Property Federation’s annual conference in London last week, told delegates the UK’s low growth means it is at a greater risk of deflation than inflation.
He says: “The worries we have about inflation are misplaced and misconceived. The big concern is the risk of deflation.”
Blanchflower adds that with gross domestic product averaging zero over the past six months, it is the risk of deflation that keeps bankers awake at night and this could force the Bank of England to keep interest rates at about 1% for the next four to five years.
Gary Styles, strategy, risk and economics director at Hometrack, says most economists agree prices will fall this year and next but by how much remains open to debate.
He says that while a fall of 10% to 15% is a reasonable prediction based on house price-to-earnings ratios, wages could rise, which would reduce the amount house values need to fall by.
Styles says: “We expect house values to fall by about 5% in 2011 and another 5% in 2012.
“This will push more people into negative equity but the key issue is that there could be a spike in repossessions if interest rates rise considerably next year.”
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