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Last Updated: Wednesday, 22 November 2006, 10:27 GMT
House prices 'set for slowdown'
A thatched cottage
UK property wealth has tripled in the past 10 years
The UK's rampant house price inflation is likely to slow down dramatically in the next year or two, according to a former government economic adviser.

The prediction comes from David Miles, the Morgan Stanley chief UK economist.

House prices have risen more than twice as fast as general inflation in the past 10 years.

But Mr Miles, a former government adviser on the mortgage market, says house prices will soon slow down so much they lag behind general inflation.

We are likely to have significant falls in real house prices once those expectations come down, but... the timing is very hard to fathom
David Miles, Morgan Stanley

However, Mr Miles cautions that predicting exactly when prices may fall is extremely difficult.

"A substantial fall in real house prices is likely at some point in the relatively near future, though it could yet be one or two years away," he warned.

Three years ago, Mr Miles wrote a review of the UK mortgage market for Chancellor Gordon Brown.

Coming bust?

This latest report, entitled UK Housing: How did we get here, is the latest prediction that the current house price boom will come to an end some time soon.

Earlier this month, accountancy firm PricewaterhouseCoopers predicted there was a one-in-three chance of UK house prices falling by 2010.

And last week, the Financial Services Authority (FSA) warned banks to make sure they could survive if house prices fell by as much as 40%.

This year, however, prices have started to accelerate again and are now running about 8% higher than a year ago.

Recent figures from the Land Registry revealed that the average property in England & Wales now costs more than 200,000.

Speculative expectations

In absolute terms, UK house prices have almost tripled in the past decade, but compared with the rise in prices generally, "real" house prices have roughly doubled - up by 112%.

Mr Miles says the single biggest factor driving up house prices in the past decade has been the expectation of buyers that prices will keep on rising.

As well as speculative expectations, the main factors pinpointed by Mr Miles are the rise in people's incomes, the rapid growth of the population and the cheap cost of borrowing due to low interest rates.

Of these, he says the expectation that prices will keep on rising by about 10% every year has accounted for between one-third and half of the excessive rise in prices seen in the past 10 years.

"We are likely to have significant falls in real house prices once those expectations come down," he warns.

"But our simulations suggest the timing is very hard to fathom."




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