House prices could fall by 15%, warns bank expert
Copyright 2004 The Financial Times Limited
Financial Times
April 15, 2004 Thursday
SCHEHERAZADE DANESHKHU
House prices are likely to fall by up to 15 per cent if the upward trend in interest rates continues, Goldman Sachs said yesterday.
Ben Broadbent, senior European economist at the investment bank, said: "The housing market is over-valued - I don't think that's contentious - so it's vulnerable to a fall. What is uncertain is the timing and amount and what effect a fall would have on the economy."
Interest rates are expected to rise next month partly because of concerns about the growth in house prices.
Mr Broadbent's comments come amid a debate after remarks made to the Financial Times by Tony Dye, the City fund manager.
Mr Dye, chief executive of Dye Asset Management, predicted falls of 30 per cent and dismissed the widely held view that the property market was headed for a soft landing.
Goldman Sachs forecasts a fall in nominal prices of 10-15 per cent over two years beginning later this year.
Mr Broadbent said a fall in prices might slow economic growth but was unlikely to lead to recession partly because households were better off than in the last downturn.
The debate has divided experts. Mervyn King, governor of the Bank of England, forecasts house price growth will fall to zero within two years and Gordon Brown, chancellor, recently told a committee of MPs that "the growth in house prices will moderate".
Halifax, the largest lender, said higher interest rates and increasing difficulties faced by potential first-time buyers in getting on to the housing ladder would lead to a "gradual slowdown" in house price inflation. But it saw no danger of a crash.
Steven Bell, global chief economist at Deutsche Bank, who predicted the last downturn, said there was no chance of a housing crash because the economy was not in recession and unemployment was not high or rising, as in previous falls.
"If the housing market were to weaken markedly, interest rates would be cut. In previous housing recessions this was not possible because interest rates were tied to the exchange rate, as in the early 90s, or there was a massive surge in inflation as in the mid-70s," he said. "I would happily wager Pounds 100 for charity that his (Tony Dye's) forecast is wrong."
But Andrew Oswald, professor of economics at Warwick University, stood by his prediction of a 30 per cent fall. "It's sensible to be gloomy. Herd instinct and confidence is holding up the market but in the long run, that won't work."
Gavin Cameron, research fellow in economics at Nuffield College, Oxford agreed: "No overvaluation of this kind has been corrected without a crash."
You can email me at Gavin.Cameron@economics.ox.ac.uk
Last updated: 15 April 2004.
