House Prices Could Fall By 30%
MPC member Professor David Blanchflower has forecast that house prices could fall by 30%. He also called for interest rates to be cut to head-off a recession. Meanwhile Halifax’s rights issue failed, but some mortgages are on their way down.
A member of the Bank of England’s Monetary Policy Committee has said that house prices could fall by another 30% before recovery kicks in two years from now.
Professor David Blanchflower gave a gloomy prediction in a newspaper interview. It would mean house prices losing a further £54,000 of value on an average value of just over £180,000. That would take house prices down to the level of 2003. Anyone who bought a property in the intervening five years would see any gain in equity wiped out. Already in 2008, 8.6% has been lost from the value of properties on average.
As Professor Blanchflower is on the MPC his forecast cannot be dismissed easily. He made a similar forecast back in April saying that UK house prices were 30% higher than justified by fundamentals.
Such a fall in property values would plunge many homeowners into negative equity, with their outstanding loan being more than the value of their home. In such a situation families cannot move and are trapped in their home.
However, for first-time buyers the continuing downward slide of property prices is good news as it may make houses more affordable.
In addition, Blanchflower would like the Bank’s base rate to be cut to avoid a recession in the UK. Having come down from 5.75% since last December, further cuts in the interest rate would be welcomed by the Professor. He believes we are almost in a recession, and immediate action is required. Further inaction would invite further risks.
The lack of mortgage money remains a problem for the banks, and Halifax has failed in its bid to raise £4bn from shareholders in a rights issue. A mere 8% took up the offer after shares fell below the offer price.
However, some mortgage rates have been coming down recently. The average two-year fixed rate is 6.96%, having peaked a few weeks earlier at over 7%.
