|House prices 'to crash 20pc by 2012' as Budget bites, says Capital Economics|
Jul 21, 2010 Philip Aldrick telegraph.co.uk
House prices will crash more than 20pc over the next two years as a result of Government spending cuts, tax rises and a surge in unemployment, according to a leading economic forecaster.
Capital Economics, the consultancy led by Roger Bootle, expects house prices to fall 5pc this year, and 10pc in each of 2011 and 2012. In total, the group predicts a collapse in house prices of 23pc from the start of 2010 – a deeper drop than the 19.3pc crash during the recession.
The numbers imply a torrid second half of 2010 as house prices are currently 3pc higher than the start of the year according to Nationwide Building Society, whose figures Capital Economics is mapping.
"Higher taxes, spending cuts and rising unemployment all point to fresh house price falls this year and next," the forecasters said in a report. "The benefits of low interest rates will be undermined by a fresh tightening in mortgage lending criteria."
It is the second report in less than a week to make grim reading for Britain's homeowners. PwC warned "there is a 70pc chance that UK house prices will still be below peak 2007 levels in 2015 in real terms ... and that real house prices [after inflation] may not regain their previous peak levels until around 2020".
Average house prices peaked at around £187,000 in October 2007 before collapsing for 16 months consecutively, according to Nationwide. The subsequent recovery has left them at £170,111 – 9pc below the top of the boom.
Capital Economics justified its outlook by noting that the house price-to-earnings ratio is still far above its 4pc long-run average at 5.5pc, and stressing that mortgage rates will only get more expensive. It expects "London to be hardest hit by the second leg of the correction". However, it cautioned that the 2012 forecast "is highly uncertain".
The firm's prognosis is based on considerably worse outlook for the economy than the Treasury's. Capital Economics expects the economy to grow just 1pc this year, 1.5pc next and 2pc in 2012, against official forecasts of 1.2pc, 2.3pc and 2.8pc. Unemployment, it added, will rise to 3m after 750,000 public sector job cuts against the official forecasts that unemployment has peaked despite a looming 500,000 civil service cuts.
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