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Monday, November 5, 2007

Fall in London house prices

House price falls will become widespread in 2008 and 2009

House prices in the UK are expected to fall by 3% next year, according to a housing market analysis for 4Q2007 by Capital Economics Ltd, an independent economic consultancy specialising in the economics of the financial and property markets.

According to Capital Economics, a period of gently falling house prices is about to begin

"A stabilisation of house prices in 2008 is no longer our central scenario. Rather, because of the weaker economic outlook, poor affordability, tighter lending criteria and rising defaults we now expect house prices to fall by 3% next year. We also anticipate a further 3% fall in 2009. London house prices should hold up, but most regions will experience declines," says the consultancy.

Although house prices did not fall when affordability was also strained in 2004/2005 when the economy slowed, some key factors, however, have changed materially since then. For a start, says Capital Economics, it is now even less affordable for new buyers to enter the housing market.

"The Northern Rock debacle is also sure to have put a dent in the hitherto high level of confidence in the housing market. There are also fears that the risks of a US-style subprime crisis are being underestimated. What's more, we think that lingering inflation concerns will prevent any repo rate cuts until next year. And even if the repo rate is cut sooner and/or more extensively than we expect, the availability of mortgage credit will be reduced as UK lenders adopt a more cautious approach," it says. Thus, with finance more difficult to obtain, Capital Economics expects housing market activity levels to fall by more than 15% in 2008 and to remain subdued in 2009.

It adds that financial turmoil has weakened the outlook for London, but a stagnation of house prices in the capital seems most likely in the short term. "Housing affordability is worst in parts of northern England, the Midlands, Wales and the South West. These regions will also be hardest hit by softer household and public spending. Thus, by and large, we expect them to suffer the largest house price falls."

Typical buy-to-let returns are likely to be negative in 2008 and 2009 as net yields remain below mortgage rates and as capital gains — the key support for investment demand in the past few years — turn into losses. This will dampen new investment, but Capital Economics does not expect a collapse in the sector.

According to Capital Economics, a period of gently falling house prices is about to begin. "To be fair, aggressive interest rate cuts could be a mitigating factor. But given that houses are overvalued, however, and that there is scope for sentiment to reverse sharply, a bigger correction than our central view is certainly possible," it says.

Capital Economics is retained by financial, property and industrial and commercial companies to provide regular analysis and advice on the state of the economy and the prospects facing their own sectors. It also undertakes specific research projects commissioned by companies, government agencies and trade associations.


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