Page last updated at 01:02 GMT, Thursday, 12 June 2008 02:02 UK

How far will house prices fall?

By Ian Pollock
Personal finance reporter, BBC News

Block of flats
The house price bubble has burst spectacularly since last summer

The nation's newspapers, broadcasters and even, dare I say it, online news organisations, are in a frenzy about house prices.

Stories abound about falling prices, slumping sales, negative equity, and even repossessions.

According to two of the UK's biggest lenders, prices have fallen off a cliff in the past few months.

The Halifax says prices dropped by 6.6% between December and May, with 6.3% coming in just the last three months.

The Nationwide reckons they have fallen by less, down by 4.7% in the first five months of the year, and by 3.2% in the past three months.

So, how much further could they fall?

Big scary numbers

If we extrapolate from the Halifax's 6.8% drop so far this year, then 2008 will end with house prices down by 15.8%.

I think we are unlikely to see the fall continuing at that kind of pace
Martin Ellis, Halifax chief economist

If we think the rest of the year will be just like the past three months, then prices will be even lower - down by 21.3% by the end of December.

The Halifax's most recent prediction was that house prices would fall by mid-single digits both this year and next.

Not surprisingly it is currently revising its thoughts.

The bank's chief economist, Martin Ellis, admitted that as prices had already fallen by nearly 7% there was a good chance they would fall further by the end of the year.

"It's a possibility," he said. "But I think we are unlikely to see the fall continuing at that kind of pace."

In defence of his argument, he pointed out that monthly changes are often volatile.

Even in periods of prolonged upswing or downswing, monthly house price fluctuations can be small, or even go against the prevailing trend.

Not so scared

The Nationwide's figures also suggest prices may have further to fall, though not by as much as the Halifax's data might indicate.

Block of mansion flats in London
Next year the average property may be worth 20% less than at its peak

However, if the rest of the year is the same as the first five months, then based on the Nationwide's figures, 2008 will end with prices 11% lower than from where they started.

And if things go on as they have done in the past three months, then this year's decline would hit 12%.

Martin Gahbauer, an economist at the Nationwide, believes a fall of a bit less than that is possible.

"Given the pace at which things are going, a change of around 10% is conceivable," he said.

"Low transaction levels have been a pretty good indicator.

"But if there is a pick-up in transactions then the falls could be mitigated," he added.

Revised predictions

Never the less, reality seems quickly to be outstripping the predictions made by expert commentators just a couple of months ago.

The two key factors are lower interest rates and mortgage availability improving
Ray Boulger, mortgage broker John Charcol

The Council of Mortgage Lenders (CML) revised its forecasts just last month and said that prices would now fall by about 7% this year.

It is still sticking to that view.

"I don't think anyone is expecting the monthly rate of decline in the Halifax figures to just carry on," said Bernard Clarke of the CML.

Over at the mortgage brokers John Charcol, Ray Boulger acknowledged that his recent prediction of a 7% fall this year was now looking a little optimistic.

"We would certainly have to expect them to fall by more than 7% now, especially as bank rates may not fall this year - so about 9% this year," he said.

So what about next year?

Mr Boulger points to the possibility that pent-up demand from first-time buyers, who have been out of the market for 18 months or so, could help revive sales and stop prices falling.

"The two key factors are lower interest rates and mortgage availability improving, so next year is difficult to forecast," he said.

"I am not in the camp of those expecting substantial falls in 2009 so I think they will be little changed over the course of that year," he added.

Danger of recession

That view is shared in part by Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (Rics).

To Let signs
Demand for rented property is still strong

"Our members are seeing prices falling but the drops are relatively modest," he said.

He pointed out that enquiries from potential new buyers had stopped getting worse and that there had not been a pick up in distress sales.

But he admitted that his view, that prices would fall a bit more next year, then edge back a little, depended on some big economic factors.

"The real danger is if there is a recession and lots of people lose their jobs," he warned.

"And if lenders don't start lending again it will be premature to start talking of a recovery on sales or prices," he added.

'Pace of decline'

Analysts agree that the availablity of mortgages and loans will be a key issue in deciding how far and how quickly house prices decline.

If lenders continue to back away then the pace of decline could be sustained for some time
Ed Stansfield, Capital Economics

"If lenders continue to back away then the pace of decline could be sustained for some time," said Ed Stansfield at Capital Economics.

"There is every chance of a larger than 8% fall this year and more than 20% fall in total," he said.

However, he points out that the aggressive price falls revealed by the Halifax and Nationwide have not been replicated in other surveys.

Department of Communities and Local Government (DCLG) says prices are still 5% higher than a year ago, while the Land Registry for England and Wales also reckons they are higher, though by a lower 2.7%.

So although the market has clearly been slowing down, perhaps the process has not been quite as dramatic as some lenders and commentators have suggested.

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