Page last updated at 16:01 GMT, Monday, 8 September 2008 17:01 UK

House prices 'to reduce by 25%'

BBC News exclusive
Robert Peston
BBC business editor


Graham Beale's forecast for the housing market

The chief executive of the Nationwide Building Society has told BBC News that he thinks house prices could fall as much as 25% from their peak.

This prediction implies that 2.5 million homeowners could be pushed into negative equity.

Graham Beale also said he does not expect to see signs of recovery in the housing market until 2010.

Nationwide is by far the UK's biggest building society and is closer to the housing market than many others.

Over the course of the business cycle it provides slightly fewer than one in ten of all the mortgages in the UK - though its recent share of new home loans has been a bit less.

So Nationwide's chief executive, Graham Beale, carries weight when prognosticating.

What he said in an exclusive BBC interview on Monday is that he does not expect the housing market to show signs of recovery till 2010.

"I think we are into 2010 [before we see signs of recovery]," Mr Beale said.

"I think that next year we will see a similar pattern to this year...we will see further falls in house prices. And I think before we really get to the new world, whatever that is, I think we will be into 2010."

Negative equity

He also forecasts the peak-to-trough fall in prices will reach 25%..

That is a very significant drop.

It would mean that a typical house would have decreased in value by a quarter during the two-and-a-bit years from last autumn, when prices peaked, to some time in the next decade.

If Mr Beale is right, some 2.5 million homeowners would suffer from negative equity, according to research by Michael Saunders of Citigroup.

That would mean 22% of all householders with mortgages would have home loans greater than the value of their respective homes.

Beale believes that there is little the government - or anyone else - can do to stem in any significant way what he believes is a necessary adjustment of prices.

Confidence boost

He says that the US Treasury's colossal scheme to shore up the two great providers of housing finance, Fannie Mae and Freddie Mac, should help to restore confidence in financial markets.

But, he adds, it won't swiftly revitalise the UK housing market - even though Britain's prospects are inextricably linked to prospects for the US residential property market, because of its importance for the funding of the global financial system.

That said, the UK government is under pressure from banks and building societies to help them raise money so that they can lend a little more to us in the form of mortgages.

Treasury battle

The two options being considered at the Treasury are to provide a taxpayer guarantee for mortgages packaged up as bonds for sale to investors, or to extend an existing Bank of England liquidity scheme so that it could help banks to refinance new mortgages.

Both options would be designed to increase the confidence of global investors that money they provide to banks for lending in the form of mortgages would be safe.

And both options are loathed by the Governor of the Bank of England, Mervyn King, because he believes they could distort the housing market.

This creates the tantalising prospect of a serious showdown between the Bank of England on the one hand and the Treasury and 10 Downing Street on the other over the best way to revive our housing market, our banking system and our economy.

And it is one which needs to be resolved by 1 October, when the existing Bank of England liquidity scheme runs out.

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