House prices 'will drop for another two years'

The property market collapse still has two years to run and will not bottom out until prices are 35 per cent below their peak, a leading City forecaster warned today.

George Buckley, chief UK economist of Deutsche Bank, said the slump in prices that began last autumn had only run a third of its course.

His prediction is in contrast to some property market professionals who say that the market will bottom out by next summer.

Mr Buckley believes the hugely distorting effect of the long boom has been underestimated and that this crash will be worse than the early Nineties.

By the end of 2010 prices will be back to levels last seen in spring 2003, putting millions of owners into negative equity.

He said: "If you look at what happened in the early Nineties it is arguable that like then we had had a big boom, but this time we've also got a credit crunch and a global recession on top. Property was massively overvalued. It was always the elephant in the room that nobody would admit to."

But it will be good news for first time buyers who should be able to take advantage of a historic "sweet spot" when interest rates hit all-time lows but before the market start to rise again.

His forecast came on the day of another grim set of figures on mortgage approvals. The total sank to a new record low of 17,773 last month, according to the British Bankers' Association.

Other forecasters have been less apocalyptic in their predictions but even the most optimistic say the market will get worse before it gets better.

Stuart Law, chief executive of property investment firm Assetz, said prices would only fall "modestly" in the first half of next year, hitting bottom after the summer.

He said: "We are certainly not going to return to the boom times in the near future but we should see a modest increase in property sales levels, mortgage offers and indeed general interest in property in 2009. However, we are unlikely to see a return to a healthy level of activity in the housing market until 2010, or even 2011."

However, there was some good news for the London market. One central London agent said the collapse of sterling has attracted record numbers of Europeans.

According to research by agents Marsh & Parsons, the average completion price in Kensington and Chelsea is down 24 per cent in sterling terms but 42 per cent if measured in euros.

Peter Rollings, managing director of Marsh & Parsons, said: "European buyers, especially Italians, are piling into London's property market and supporting prices locally. As far as they're concerned, there's never been a better time to buy - they're snapping up the bargains.

"While the British economy is faltering, the euro is getting stronger and this is the result. This week we've seen two Italian couples competing over a £700,000 property in Battersea."

The agency also forecast a recovery in the lettings market next year. Lettings director Emilie Dawes said: "The price readjustment we have seen over the past four to six months in the lettings market has led to a healthy number of transactions as landlords' and tenants' expectations become more closely aligned. The exceptionally busy end to the year bodes well for a strong start to 2009 - for landlords, the worst may now be over."