Property Prices To fall Up To 10% In 2008

The UK property market is on the brink of a record slump according to one of the country’s leading experts.

Morgan Stanley’s chief economist David Miles has warned that property prices will fall by 10% in 2008. That would be the biggest annual fall since records began in 1969.

A price fall of this magnitude could plunge many property owners into negative equity and recall some of the worst days of the recession of the 1990’s. And Mr Miles has warned that property prices could continue to fall further in 2009.

The predicted drop will be caused by 5 interest rate rises and the turmoil in the banking system which is leading to a sharp increase in the costs of borrowing.

Only last week Bank of England governor Mervyn King warned that strains in the finances of major banks will force them to reduce the supply of credit, hammering property prices.

The latest figures bear out a picture of falling property demand. Prices dropped at their quickest monthly pace in 12 years during November, Nationwide Building Society figures showed last week. Mortgage levels fell to their lowest levels since February 2005.

However, Mr Miles added that falling property prices may not be a bad thing. There’s a natural tendency to view it as bad for the economy, as unhealthy. We have a problem of affordability of housing with people struggling to get onto the property market.

Where a 10% fall in property prices sounds large, it takes us back to where property prices were at the end of last year or even at the beginning of this year. It was impossible for property prices to continue rising at the rates we have seen.

Other forecasters and experts have predicted falls next year but not on the scale of Mr Miles predictions. Capital Economics predicts a 3% reduction in property prices next year while Nationwide expects prices to remain flat for 2008.