House prices set 'for 7% fall'

HOUSE prices are set to drop by 7% over the next three years but there is a one-in-four chance of an early Nineties-style crash, a top investment bank warned today.

Lehman Brothers said a global downturn, tax increases and a sharp rise in mortgage repossessions could send prices plummeting by as much as 17%.

Even if prices fall by only 7%, as seems likely, the knock-on effects on the broader economy would be severe.

Consumer spending would slow to its weakest since the early 1990s recession and the economy would expand by less than 2% in 2006, compared with Gordon Brown's prediction of growth of between 3% and 3.5%. The Bank of England would be forced to cut interest rates in November and continue doing so until borrowing costs were back down to 3.5%.

Lehman's UK economist, Alan Castle, said: 'House prices are about 15% overvalued. Our central forecast projects falling house prices and a sharp slowdown in consumption growth.

'In nominal terms, house prices fall back gradually, although the volatility of the data could well mean a few months of falls being followed by a small gain. In cumulative terms, we judge that prices may fall by 7% between now and end-2007.'

Explaining the bank's doomsday scenario, Castle said: 'Nominal prices fall about 17% over a three-year period, much closer to what might be termed a 'housing crash' story, as it would be on the same scale as occurred in the early Nineties. We would attach something like a 25% probability to this scenario.'

The prediction came as official figures released by Deputy Prime Minister John Prescott's office today showed the housing market continued to slow in January, the annual rate of increase falling from 10.7% to 10%.

Meanwhile, estate agent Haart said that first-time buyers' share of all house purchases in London fell from 21% in January to 19% in February. The decline came as house prices in the capital nudged up by 2% last month.

Russell Jervis, managing director of Haart, said: 'First-time buyers, who often struggle to raise a significant deposit, have also been penalised by archaic stamp duty levels.'

The Chancellor is widely tipped to raise the starting rate threshold on stamp duty from the prevailing £60,000 in Wednesday's Budget. However, few first-time buyers in London will benefit from the move.