House prices to bottom out 35% below peak

Capital Economics, the independent economic forecasting agency, is predicting that by next autumn, UK house prices will have fallen 35% from their peak, in summer 2007.

The collapse will take £65,000 off the average price of a home, which could be worth £120,000 this time next year, down from £186,000 in the market boom.

A fall on this scale would return prices to the levels last seen in 2003.

The firm has revised an earlier assessment of the market in line with the most recent forecasts for the economy, having previously predicted that house prices would drop 35% by the end of 2010.

Once the market has bottomed out, the company’s analysts expect an 18 month period of stagnation before a tentative recovery begins in 2011.

Capital Economics property economist, Ed Stansfield, says the speed of the adjustment is causing alarm but adds that the sooner house prices return to fair value, the less damage the correction will cause in the wider economy.

Earlier this week, HM Revenue & Customs reported a 53% decline in housing transaction in September, to just 59,000, and analysts expect the number to decline further.

At the same time, repossessions are set to rise, as thousands of households fall into negative equity.

Last week, research published by credit rating agency, Standard & Poor’s, suggested that 335,000 homes will be worth less than their mortgages by the end of October, a rise of 260,000 over four months.

If the trend continues, the number of homes with mortgages above their value could exceed the 1.8 million level seen in the 1990s.