House prices 'won't crash'

A LEADING economics think-tank today warned of two years of falling property prices, but insisted the market is heading for a soft landing.

A week after Bank of England Governor Mervyn King said Britons should be wary of buying a home because of a potential collapse in prices, the Centre for Economics and Business Research said tight supply and strong demand would continue to underpin the market.

It sees house-price inflation dipping from 22.4% last year to 15.2% this year, before slowing sharply to 3.5% in 2005. The subsequent two years could see prices fall, by 1.5% in 2006 and 2.3% in 2007, before picking up again in 2008.

'Most parts of the country will see a soft landing rather than a crash,' the report says. 'We have argued in recent years that the housing market, particularly in London and the South East, is underpinned by a shortage of supply and by increasing demand.'

In London, house-price inflation is seen slowing from last year's 11.7% to 8.3% this year and 1.6% in 2005. Prices are seen dipping by 0.2% in 2006 and by 0.4% in 2007 before nudging up by 2.2% in 2008.

Rising interest rates will slow the market over the next year, the CEBR says. 'In addition, economic growth is likely to fall short of the Chancellor's optimistic predictions and households will be nervous about high oil prices and the risk of post-election tax rises.'

In an incendiary speech to the Scottish CBI last week, King said: 'After the hectic pace of price rises over the past year, it is clear that the chances of falls in house prices are greater than they were.'

Shares in housebuilders dived on the stock market after the Governor's comments.

The CEBR said house prices as a multiple of average earnings are set to reach a record 7.2 this year, well above the late-1980s peak of 6.4.

However, low interest rates mean properties are relatively more affordable. Average mortgage payments as a percentage of average income hit 45% in 1990 but are set to be no more than 21% this year, despite rising rates.

The predictions came as a separate survey found house prices fell slightly during the second week of June, suggesting the property market could finally be slowing.

Property website Rightmove said the average cost of a home in England and Wales dipped by 0.4% during the week as consumers began to feel the effects of four interest rate rises delivered by the Bank of England since November.

It said the figures indicated the market was entering the long-anticipated slowdown, as a rise in the cost of borrowing combined with the hot weather and Euro 2004 football championship distracted people from house buying and helped curb demand.

Despite the drop, house prices jumped 2.6% in the five weeks to 12 June, pushing the annual rate of increase to 17.2% - the highest since April last year.