House prices to fall 10% by 2013

The next couple of years are likely to see house prices fall. But will first-time buyers really benefit?

The next couple of years could represent an opportunity for would-be homebuyers to take that first step onto the housing ladder if gloomy predictions from a series of experts come true.

Capital Economics reckons that by 2013 house prices will fall by a whopping 10%, with 5% declines both next year and the year after. And while Capital Economics has a reputation as being particularly down on the housing market, it’s far from alone in taking such a view towards house price prospects.

Indeed, Knight Frank has echoed Capital Economics’ prediction of a 5% fall in 2012, arguing there will be little convincing growth until 2014 at the earliest. According to Knight Frank’s calculations, in real terms (so taking inflation into account) house prices will have fallen by 29% from the peak by 2015.

So why are house prices expected to fall so substantially? And how will those falls be spread across the UK?

It’s the economy, stupid!

Capital Economics has long claimed that property is significantly overpriced. Indeed, it reckons that current homes are overvalued by 20% compared to the historical norm.

There are a number of factors which, taken together, Capital Economics believes will see house prices move towards a more realistic level. Firstly, there’s the likelihood of interest rate rises due to the current eurozone difficulties, which would further dent the already low levels of gross mortgage lending.

Then there’s the fact that the UK’s economy is struggling badly at the moment, to the point that one member of the Monetary Policy Committee has warned there’s a decent chance the economy will actually shrink in the final quarter of the year.

Chuck in the rising unemployment figures, and likelihood of further job losses, and you can see why Capital Economics has come to that conclusion. Indeed, they are essentially the same reasons that Knight Frank cites.

A widening gap

Of course, when you talk about house prices falling by 5%, that’s not going to materialise as a flat fall across all properties – some will fall by more, and some by less.

So it’s worth noting that, according to Primelocation.com, the nation’s housing market has already split into two, with high end properties completely distinct from the rest of the market. This very much ties in with Knight Frank’s suggestion that despite prices falling by an average of 5%, central London properties will rise by 5% next year.

According to its house price index, prime properties – those in the top quarter of the market by value – rose in price for the seventh consecutive month. That’s in contrast to prices falling for the second month in a row for the rest of the market.

As Primelocation.com points out, the gap has been steadily rising since the index was launched in 2007, and has now reached its widest point.

The regional divide

However, this divide is not just down to value – geography plays a part too. Indeed, according to Rightmove’s latest house price index there has never been such a pronounced gulf between prices in the north and south.

Obviously, it’s important to remember that this index covers asking prices as opposed to actual transaction prices, but beyond demonstrating how unrealistic vendors’ expectations are, they are still a useful signpost.

And while asking prices in southern properties rose 4.7% in the month of October to reach an average of £336,743 (a new record), asking prices in the north fell back 0.7% to levels seen in May 2005. As a result, asking prices in the south are now double those in the north!

An opportunity?

It’s difficult to argue too much with the idea that house prices will fall somewhat over the next couple of years. There just aren’t that many people in a position to buy. Sure, the number of mortgage approvals for house purchases hit a 15-month high back in August, but the number was still significantly down on the peak years, as the table below demonstrates:

Source: BBA

I’m not expecting approvals to be up at the same as during the peak, but it still seems remarkable that they are less than half the figure of a decade ago.

And that presents potential difficulties for prospective first-time buyers. As lenders are doing so little lending, they are more likely to want to focus on the best clients, those who present the least risk. In other words, not first-time buyers.

So the difficulties of the coming years may not automatically be to the benefit of first-time buyers. What’s more, recent months have seen lenders more likely to deal with borrowers with small deposits,as we explained in Magnificent mortgages with a 5% deposit. Who knows how willing the banks will be to lend to such borrowers should property prices fall by 10% or more?

More: A two-year mortgage will break your heart | How to buy a bargain property

Use lovemoney.com's innovative new mortgage tool now to find the best mortgage for you online.

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call freephone 0800 804 8045 or email mortgages@lovemoney.com for more help.