Economist predicts 20% UK house price fall

The housing market in Britain is heading for five years of pain as average earnings catch up with property prices, an economist predicted today.

Capital Economics expects property prices to fall by 20% during the coming three years, before the market begins a slow recovery during the next two.

Ed Stansfield, property economist at the group, said: "Our view is that the housing market slowdown seen over the last nine months is only the start of a much more protracted slowdown."

He said prices were likely to begin falling later this year, losing between 6% and 7% over the coming three years, after which prices would begin recovering at a rate of about 5% a year.

He said the falls would not be dramatic, averaging only around 0.5% a month, with slightly bigger falls seen during some months.

But he warned that the correction would be more dramatic in regions where prices had risen most recently, such as Yorkshire, the North West and even the South West, where the value of property could drop by as much as 27%.

Mr Stansfield said the house-prices-to-earnings ratio had now peaked, with the average property worth six times average earnings.

He said: "This is significantly higher than the five-times peak reached in the late 1980s."

But he added that the ratio had just begun to edge down during the past couple of quarters as house prices had remained flat while average earnings had grown.

But Martin Ellis, chief economist of Britain's biggest mortgage lender Halifax, dismissed the fears.

He said the market was already slowing down, and while the group expected a small drop in prices during 2005, it did not expect these to be more than around 2%.

He added that the market was likely to remain subdued for the next couple of years, with property prices rising by only a small amount and at a slower rate than average earnings.

He said: "We do not expect interest rates to move higher and we are not expecting a sharp slowdown in the economy."