House prices may need to fall 30%

A Monetary Policy Committee member has warned house prices may need to fall 30% to restore a more sustainable house price-to-earnings ratio.

Prof David Blanchflower issued the warning last night during a speech at the Royal Society in Edinburgh.

Blanchflower says in his speech that property in Britain is overpriced by 30%.

He warns that unless interest rates are cut, a 30% decline in house prices would be needed to maintain a more realistic house price-to-earnings ratio.

He adds: “In my view a correction of approximately one third in house prices does not seem implausible in the UK over a period of two or three years. I am not suggesting that such a drop will necessarily occur, but it may.

“My biggest concern right now is that the credit crisis will trigger a rapid downward spiral in activity. I believe that we face a real risk that the UK may fall into recession, and aggressive action is required to prevent this from occuring.”