In the main prices won't crash at all. Bottom line each year 220k new households are formed. Currently c.180k new homes are built. Net we are eating into our buffer stock of homes at the rate of c40k per year. On the basis that households need homes to live in and we don't see folk living in tents, underlying demand will support prices.

Even if prices dip by 8 %, as interest rates drop they become an attractive investment with a + yield for BTL.

Further, you have a growing pent up demand from first time buyers, crowed out in recent months. For prices to make a fall the economy would need to fall apart with a big spike in unemployment.

In the 90's we had 3m unemlpoyed, a record level of spare housing stock and interest rates in double figures and we had just removed MIRAS. Even then prices only fell by 12% from peak to trough (over 3 yrs) in nominal terms, by c 30% in real terms as RPI was running at 10%+ pa.

L- term property goes up by 2.7% more than nominal GDP. Relax

Ian, Ottershaw, Surrey

Every boom has its bust and every bubble bursts. This bubble is now bursting and as most bubble markets tend to over correct, I think it is not unreasonable to assume that property will fall in excess of 40% in some areas and several points less in others. If you seek parallels, look no further than the Japanese property market, built on the ready availability of cheap credit in the 80's (sounds familiar) it has fallen for the last 16 straight years, only beggining to reverse the trend in the last few months.
When young people can no longer afford to get onto the property ladder without incurring life long debt then something has gone badly wrong and the correction will be very welcome. It will certainly be painfull, those that have encumbered themselves with insane levels of debt will indeed be in dire straights, but after all it was them that helped to fuel the boom.
In a few years, those that have not rushed in but have waited, will be rewarded with reasonably priced property.

henry thornton, southampton, hampshire

Have a look at this graph of UK historical house prices.

http://www.housepricecrash.co.uk/graphs-average-house-price.php

I wonder how much worse the whole thing will become when the next wave of financial derivatives unravel.

Securitisation of mortgages was not the only clever little wheeze of recent years. It's also been done with junk corporate loans to at least 10 times the volume of mortgages.

As America enters recession these securities will start to unravel. It could make the 1930's depression look mild.

John, Hove, UK

RS, Melb, Aust:

What you and several other soubters don't seem to have factored in is credit.

The real reason why property has shot up in price is the availability of very easy money - lots of it and very cheap to the wholesale market (i.e. 0.5% interest if you borrow in Japanese Yen - the so-called carry-trade). That money has been made available to buyers on the most relaxed terms - no deposit, 6 x multiples of earnings, etc. etc. The finance industry was making profits on all this lending (e.g. Northern Rock), but the game has changed.

The bottom line is: No credit, No deal. Have a look around at how the mortgage market has changed in the last few months. Prices will fall, simply because for most buyers the leverage has disappeared.

MarkS, Leeds,

Contrary to what the journalists say, estate agents do not remotely mind prices falling . Indeed lower prices mean greater affordability which means easier buying conditions. What estate agents bemoan is (like any business) fewer customers. Fewer customers mean falling income and falling income means lower investment, redundancies and business closures. Get real.It's happening already. Ask your local friendly estate agent in a quiet moment. Behind the ready smile and warm handshake there is a worried individual. After all thery're just like you and me - they have mortgages to pay for, kids to feed, bills to pay, cars to run...........

Jon - what is your miracle formula for what people can afford to pay? Banks lend money in ever increasing multiples of income and for ever increasing lengths of time. Why? To ensure we owe money to them ad infinitum. A great business model when you think about it and one which (without interest rates) controls house prices -! Customers for life we are.

Guy, Norwich, UK

There is no REAL shortage of housing - HSBC's chief economist has recently concluded as much by comparing rents with prices - rents have barely risen over the last five years. HSBC concluded that most of the price rises came from speculative buying (largely B2L) and that nationally house prices are overvalued by some 30% compared to their long term rental value. Rental values increased at their SLOWEST rate for a number of years in the last three months showing that even here demand is tailing off.

The Royal Town Planning Institute also concluded over the summer that the biggest house builders controlled a landbank with some 500-700K plot permissions granted - that's 4-5 years supply without any "planning delays" - the only reason they are not being used is that the house builders like to do a slow release to maintain the illusion of scarcity (and because the landbank boosts their share-price).

So a 20-30% decline in real terms over the next 2-3 years looks possible>

Huw Sayer, Norwich, England

Hello Nick and any other denialists.
I'll add a source that's not tabloid. Investment bank ABNAmro reported early this year that UK house prices were due a 40% correction. source?
http://www.housepricecrash.co.uk/pdf/abn-amro-home-truths-04042007.pdf

The last crash in the early 90s was slow and fell by around 30-33% in real terms. The present bubble has grown larger through more widespread speculation (BTLs and REITs weren't around in large numbers in the 80s). It is certainly conceivable that prices will fall by 40% this time. The BTL market is heavily weighted towards purchases in the last two years when prices were already high; their rents are simply not covering interest costs.
The rational will sell - the less rational will hang on for a better price and lose even more money. To those who fear stagnation and months trying to sell, a tip. Lower your price! Sentiment has turned. Can we please be rid of all the property porn channels?

Roberto Birquet, London, UK

If prices do tumble by say 40% then the losers would be the recent first-time buyers who would find themselves in negative equity. I personally would be delighted if they were to fall by this amount as I would be able to trade upwards more easily. A 200k property would suddenly become a 120K one. My own 120K home would be worth 72K. To buy the same house I would need to find 48K as opposed to 80K.
However, my wish is a selfish one and those first-time buyers would be feeling very aggrieved. In order to prevent this boom and bust scenario happening we need to change things drastically. Banks need to be policed by the government to ensure they do not lend borrowers more than they can comfortably repay. The French model should be copied and aspired to. Although buying and selling costs are a lot higher, prices by and large rise steadily in line with inflation meaning there is little danger of a buyer ending up saddled with a home that is worth less than what was paid.

jon, derby, uk

If Sophie is smoking something so is the OECD, who said earlier in the year that UK house prices are 60% overvalued. The OECD is an international organisation, so it does not have to talk up UK property as our deluded house owners and mendacious estate agents and banks have to. A drop of 60% would be inconvenient for individual house owners of course, though if they began to treat their houses as somewhere to live rather than as cash machines it would hardly matter. For the banks however it would be more serious as their 'assets' (what normal people call loans) would no longer be recoverable. If you are worried about your property's value you are not half as worried as your lender is. So, Happy Christmas homeowners. And Happy Christmas Northern Rock. And Alliance and Leicester. And Bradford and Bingley and Uncle Tom Barclay and all. And instead of Auld Lang Syne we'll have a rousing chorus of 'The Party's Over' at New Year. Because, make no mistake, it is.

eric campbell, harrogate, uk

It is about time that estate agents were put in their place.
On so many occaisions agents have adopted a superior attitude and almost scorned potential buyers who had not already found buyers for their own properties.

Paul Nicholas Gibbins, London,

Nick, are you giving us "it's different this time" old chestnut? An estate agent perhaps?

The future cannot be predicted so it is more reasonable to consider that past patterns of falls represent one possible outcome for this market. Obviously the last of these cycles was in late 80's/early 90's. Misplaced optimism from people such as you reinforces my suspicion that a huge fall may be on the way again.

Steve, London,

Here we go again, why is it such a bad thing house prices are coming back down to earth, the only people who will lose out are greedy btl investors, estate agents and yes, the Govt, theyve made a nice few billion over the last few years on inheritance tax-quick pump some more immigrants in and create a shortage that will get them up again!

steve, coventry, west midlands

For those of you rejoicing the crash in property properties, I hope that your job is secure in the recession that will follow a significant fall. The fall-out will be felt not only by homeowners and 'bankers' but also by the economy as whole.

J, Colombia,

once the various biases have been removed from the analysis we are still left wondering, the IMF estimated we were 30% overvalued, but that should be offset by natural inflation. and add in market panic! the worrying factor is that with effective unemployment factored in the situation is potentially worse than the 1929 era US market! A correction in salaries of basic workers is the only way to correct the housing market (as most workers cost of living increase has been under valued by about 20% of current salary due to poor inflation reporting) which leads to inflation. It will be an unpredictible bumpy ride.

Ben, folkestone, uk

It's about time they started to decline. It's ok for everyone who's buying their second homes and making a mint but what about us first time buyers?!

Emma, Devon, UK

Supply and demand, the lack of supply that is, helped raise house prices, now major builders seem to slowing down the building of new properties, so supply can only get lower.

Property crash, I don't think so.

ewan, sherborne, dorset

Nick (Potters Bar)

Try spreadfair - price falls of 15% are already priced in over the next three years. When you add on rpi inflation of say 4% pa cpmpounded over three years then we have price falls of around 30% already priced in.

When people in denial (such as yourself) cotton on, the falls will escalate. 40% over 5 years is a conservative estimate.

Remember, 30% is ALREADY priced in.

Happy xmas

Karl, Skipton, uk

Nick of Potter Bar ignores the pattern established in all the post war slumps when residential values fell by around 30% each time. The property market always overshoots at the top and bottom.

Arnold Ward, Weybridge, Surrey, UK

Seems to me that the views are dependant on what the writer wants, rather than a sensible view of the situation, and just the same as the prices were previuosly talked up, there is now a determined effort to talk them seroiously down, regardless of the effect on the rest of the economy, and therefore on everyone

Frances, Somerset, Uk

I couldn't agree more with this article. Painful though it may seem, the action of housebuilders are the obvious key to what is going on and it isn't going to be pretty. Just have a look at the steep slide in house builders shares.
So, you have august bodies of international economists predicting the slide of possibly 40% and now you have the guys at the pointed end of housebuilding taking action. You also have to remember that sliding prices are not going to encourage first time buyers to part with their deposits. They are going to be watching mesmerised as house price falls gather pace. Then you have Gordo's promise to build all those new house. He isn't kidding either - he has already been bribing local authorites' to identify more building land. There are now forms for ordinary citizens in Lancashire to suggest possible sites for house building. Finally you have the changes to Capital Gains tax, which after April will encourage many BTL investors to finally sell up.

Diddly Do, Liverpool,

>>The RICS said that prices would rise by 40% in 5 years.

Surely the RICS has a vested interest in trying to maintain the property bubble in any way it can, including misleading statistics? How on earth do they know what prices are going to be in five year's time? If the economy slumps then all those Polish workers are going to be heading back east or somewhere else where the grass is greener, so less need for housing rather than more.

Lawrence, London, England

Nick,

Who says house prices will fall by 40%, only the International Monetary Fund and HSBC amongst others.

As for a small dip last time I suggested you look at

http://www.nationwide.co.uk/hpi/historical.htm

It shows that houses fell in real terms by 40% after the 1990 slump peak to trough. what's more we are further from the trend line this time around with higher personal and national debt. It could easily be worse this time! Add in Buy to Let landlords wishing to sell and things could get very interesting indeed. In Japan house prices are still only one quarter of the 1990 value, why? Huge personal debt has put the consumer off borrowing and the banks off lending, sound familiar?

Mike, Derby, UK

As they take a percentage of the sale price, as opposed to a flat fee, of course the Estate Agents are complaining, but all thet will do is to hike up the percentage taken, as always, it will be the buyers who lose out.

David Yeomans, Hill Head, Hampshire UK

Quite pleased I sold my house a couple of weeks ago. I think I will stay renting for a few years. I realized it was a bubble when the rolled out the 15 year old BTL landlord. It was the same 15 year old they brought out when share dealing was all the rage then when t'internet was the next big thing.

rob, lauder, berwickshire

perhaps looking as the swiss property market may indicate the future
prices there being so high it is more normal to rent
as we move towards that
those who overburden themselves with mortgage payments will crash when either interest rates go up or they become unemployed.
darwinism in action
the flood of easy credit, the pace of immigration and limited land space combined has simply brought it all to a head at this time.

stephen, northampton, engand

with respect,intrest rate is coming down,thus, lower £ rate,foreigners will buy more of london properties, and the effect will spread ,well at least london & south east...jobs are at all time high, people have to live somewhere,renting or owning, so why the gloom ?...when all 'experts' tell you something very very gloomy,the do completely the opposite !!..property is the best investment ever in the long term...essam

Essam, Hove, UK

People seem to have a habit of taking the last few years data and drawing a straight line into the future. House prices have gone up and down over history. There are simply too many variables to predict the future value. Currently prices are falling, but nobody really knows where they will be in a years time. I like many people would be glad if my house were "worth" 40% less, as the "next rung on the ladder" will be a lot closer and would not mean putting myself into massive debt to be able to purchase a slightly bigger house. 40% drops have been seen, but past values do not reflect future values.

roger, london,

A shortage of housing means nothing if people wait to buy they must be living somwhere and can wait forcing the downward spiral, immigrants prefer social housing and are able to rough it. The folly of pretending the BoE was independent is now apparent, Brown cannot be hung for his stupidity but many a mortgage owner will wish he could be.

E Pryor, Gravesend, kent

The last halt in house prices was in 2005 when London dropped 10% ish. It caused a delay in the increase rate but the rise soon re-established.
No sensible BTL-er will sell now - they have income and are promised a rate cut by BOE in 2008 - there's little for them to worry about. Expect another 6 months where loans are tight., but after that we shall be in the middle of increased inflation if interets rates really do drop.
There is such a shortage of housing here that prices must always tend to rise. The answer is just buy a house to live in and not as a pension pot or some other reason.

johnwg, London, UK

Prices have fallen by 40% in the past during the 1970's.Nobody really bothered due to inflation running at around 25%.With an inflation target of just 2% is a prospect that many people will find too difficult to face up to.Face up to it they most if they want the UK economy to survive in any form of reasonable shape.

stephen hulton, eure, france

Nick:
Prices did drop by 40% in the last property recession. Maybe you are too young to remember, or maybe you have been brainwashed into believing prices will never fall significantly.

Gareth Jones, Dusseldorf, Germany

"Can you cite the sources you base this assumption on please......."

Nick , Sophie suggested that you log on to property snake for examples of massive price falls. Are you afraid to look?

anthony, london, england

Nick,

There was a recent European Bank assessment that they were 65% overpriced in London. This was also reported in the London Evening Standard. So, Probably not 40% but a great deal most people think.

Austin Tassletine, South West, UK

A house goes up 300% over the last 10 years. So what.? If you move into larger house, it too will have increased in value by 300% and proportionally you will end up paying significantly more. Who wins?
Bankers and your government, thats who. Everyone else just end up paying a much higher proportion of their hard earned income on mortgage costs.
Wake up Britain - you are being ripped off (as usual).
Wouldn't you prefer a 50% fall in prices. Thereby lower costs when moving onwards and upwards, and significantly more money in your pocket due to lower mortgage payments. Remember that a fall of 50% would mean a mortgage falling by 50% as well!

Gareth Jones, Dusseldorf, Germany

Nick

40% over 5 years might be a bit of a stretch, but it's not quite so unreasonable if you think about it over 5 years in real terms.

Say houses dropped 10% in price in one year, then stayed steady with no drops for the remaining 4 years. If inflation went up to 5% (which may seem odd in light of the last 10 years, but is an entirely reasonable figure over a longer history), then within 5 years, house prices would have dropped by just under 30% in real terms.

If you then worked out the cumulative effect of wage increases over that time and then checked what the average wage/house price ratio was in 5 years, you may find that it is returning to near the long term average, which should be neither surprising nor unlikely.

Iain Mango, London, UK

I have no problem with the concept of falling house prices, just the stagnation it inevitably leads to. I remember the early 90's when it could take two years to sell a house. You feel trapped and unable to make future plans.

chris, Stockport, uk

So prices have fallen 0.3% since November. Big deal!! Where was the panic when prices were rising at 15% a year. All I saw and read about was joy!
When you look at how much prices have risen in relation to house prices,no wonder the ordinary man/woman can afford nothing.
So long as prices exceed inflation/pay increases,then affordability will become impossible.
To bring pay levels up so that 4 times pay allows buying affordability based on todays orices,is simply not possible. Major price falls are the only answer. Surely bankers,politicians and estate agents know this?

nic, royan, france

Mark - you're having a laugh surely! I have read about this doom and gloom time and time again whilst in the UK and now in Australia and guess what, in the last 10 yrs since I first lived in the UK its been nothing more than hype. If you think property is going to depreciate so significantly in the next 12 months, surely you should be selling your house and then buying when the market 'crashes' - let me guess, won't put your money where your mouth is??

RS, Melb, Aust

Sophie;
Can I have some of what you're smoking please? Falls of 40% over the next 5 years :-O !

Try to get a grip, in London, and probably the rest of the country, prices will stabilise and dip a little as they did in the last property recession, but 40%? Can you cite the sources you base this assumption on please or are we just being a little "tabloid"?

Nick, Potters Bar, UK

"Estate agents across the UK have ended the year bemoaning falling prices, buyers in retreat and the declining chance of a speedy sale. The latest survey by Hometrack, the housing data company, suggests that values have fallen by 0.3 per cent since November, the third consecutive monthly fall and the largest in almost two years".

Only in England could we moan because prices are COMING down!

Madness. It benefits NONE of us this incessant house price increase! People are so stupid when it comes to debt and houses, they just really dont sit and think about the figures and the facts at all. The only ones who benefit are the banks with their bonuses each year. The rest of us have to struggle with ever increasing mortgage costs with many who can't even afford a basic home. Oh but what does it matter as long as my house went up in value this year ehh!

I am SO glad this bubble has now burst. Look for 50% drops across the country by late 08 :)

Mark, Peterborough, UK

I am plased to see estate agents are felling the pinch no tears from me.

J.Foxton, Weybridge,

Of course first time buyers are staying out of the market! They can't afford to buy! When teachers, firemen, nurses etc cannot afford to but a house it illustrates how ridiculous house prices are. This is just the beginning. One BTL's start off loading property prices will plummet. There are likely to be falls of at least 40% over the next 5 years. Log on to property snake. Its already happening!

sophie, norfolk,

On the basis that the upside has carried on steadily for far longer than most people predicted, I'll stick my neck out and suggest the downside will be the opposite: fast and deep.

I reckon you can add Capital Economics two figures (for 2008 and 2009) together and still be short of the total fall in 2008. Personally, I think the housing market has stopped dead in its tracks.

MarkS, Leeds,

I thought there was a shortage of land and,hence,prices would continue to rise.The RICS said that prices would rise by 40% in 5 years.That was on the 23rd July this year.Have they changed their minds?

stephen hulton, eure, france