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House prices could drop 10% next year

House prices could drop 10% next year, Capital Economics forecasts.

Paul Diggle, property economist at Capital Economics, says the Office of Budget Responsibility prediction of a 3.1% fall is modest.

He says: “Unlike the OBR’s forecast of a relatively modest decline of 3.1% in house prices in 2011, we believe that a more significant fall next year, perhaps of 10%, is plausible.

“Looking ahead, the continued boon to home-owners from the favourable level of interest rates makes predicting the pace of further falls in house prices difficult.

“But with access to credit still very constrained, demand dropping away quickly, and selling conditions deteriorating noticeably, we expect the rate of decline of house prices to accelerate next year.

“What’s more, public sector job losses as a result of the fiscal contraction, which we think could be more than double the revised 330,000 estimated by the OBR on Monday, will also weigh on house prices.

He adds: “2010 was a year in two halves in terms of house prices. Modest growth in the first six months was largely still a reflection of the supply shortages which characterised 2009.

“But in the second half of the year, the poor fundamentals underlying the housing market have weighed on prices, reversing the rises seen in the early part of the year. It now seems probable that 2010 will be one of just six years in the past three decades in which nominal house prices have fallen on an annual basis.”

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  • Ken 17th December 2010 at 5:51 pm

    It is extremely difficult to make an economic forecast and admittedly CE has been more wrong than right. But theirs was a rational voice and has its value, at least, for me.

    “most home owners simply wont sell fo less than they paid”->

    The home owners certainly will not choose to sell at less than cost, but if they cannot meet the mortgage payments, the lenders will ultimately have to. That’s what happened in 80s.

    The question now is what will determine the mortgage payments in future. Currently prime rate is low and mortgage charges have been almost overgenerous, particularly tracker and interest-only products. This may have been politically motivated.

    But now the bond ylds are hiking, unemployment rising and UK govt is getting concerned about the inflation. I feel the honeymoon period for our new govt is over. Watch out for MPC reports in the coming months.

  • A Has Been 3rd December 2010 at 11:23 am

    House prices WILL go up. Why am I so certain? Because the BOE will carry out more QE. If I’m wrong and they don’t…will go down hard!

  • bruce patterson 1st December 2010 at 11:15 pm

    More of the same from capital economics -20/30% forecast falls for the last ten years in order to gain publicity, there is no doubt asset prices are stagnate at the moment however prices will rise around 2 – 5% next year. most home owners simply wont sell fo less than they paid which regulates supply allied to reduced mortgage payments for almost all (good old Lord Young) means some good news for homeowners.

  • Dan McGeehan 1st December 2010 at 1:27 pm

    These guys have constantly forecast large falls for the last 7-8 years. Sadly with our lazy journalists this will probably get picked and appear in the mainstream press and a dent into the amount of housebuyers.

  • RMBS_Trader 1st December 2010 at 1:05 pm

    Paul – thanks for adding a more informed comment.

    People always seem to revert to the most simplistic form of supply/demand. According to the stats provided by Bob, we shouldn’t have had any decline at all.

    As for finance becoming more available – what world are people living in? Finance is likely to be made less available from the current, not more. Capital constraints, the inability to access the capital markets for RMBS, and the overall regulatory changes/requirements in the market will make accessing finance for over priced property that much harder. Call it a correction or a depression, but either way prices are (rightly) on the way down.

  • Alex Smith, Perception Finance 1st December 2010 at 12:52 pm

    I find it difficult to believe a word C.E. say anymore.

    In October 2008 C.E. predicted that house prices would be 37% lower by the end of 2010. This hasn’t happened. Their prediction for 2010 was a fall of 10%. This hasn’t happened and their forecast for next year, earlier on this year, was a drop of 5%. Now they warn house prices will be down 10% next year.

    It seems too easy to forecast a 10% drop or more each year in order to get some publicity.

  • Paul 1st December 2010 at 12:32 pm

    Bob, how does your “economics lesson” relate to the japanese property experience of the last 2 decades? Also, part of the demand equation is “ability to pay”; something that is being eroded by reduced disposable income by inflation and flat wage growth. What happens to house prices if population doubles but disposable income halves?

  • Bob 1st December 2010 at 11:49 am

    Poor fundamentals in the housing market only extends to the availability of finance. There is a considerable shortage of housing developing as evidenced by rising demand for rental accommodation.
    The latest household forecasts from the government, based on continuing high rates of net migration and increased life expectancy, show that even under the lowest scenario latest housebuilding rates are 50,000 per annum lower than required and, at worst, well over 100,000 lower.
    I was taught in my economics lessons that a shortage meant higher prices so hold on to your hats when finance becomes more widely. available because it will take builders a number of years, at least, to catch up.

  • peter stimson 1st December 2010 at 11:18 am

    Aren’t you the same guys who predicted house prices to fall every year since about 2002?

    well guess what you been right once, wrong every other time.

    Not saying you are wrong, just that you credibility