Property Prices Will Be £13,000 Lower In 2012

The Fool has predicted house prices will fall in 2008. If that's right, what are the implications?

This article has already been emailed to many Fools as part of our 'Your Finances in 2012' campaign.

...That's the prediction from my colleague, David Kuo, in part one of his report into the future of Britain.

David and I agree on many Foolish fundamentals, such as on good old index trackers and steering clear of debt. But we enjoy many a debate on other subjects, such as unlawful bank charges, bundled financial products, pensions and student loans.

One thing we can't agree on is predictions. I don't disagree with his predictions. I disagree that anyone should make them at all. There are small, easy ones that anyone can make, but things such as what level the stock market will be at in six months' time have never been consistently called. By anyone.

Predictions are widely wrong time and time again. As no economic forecaster has ever shown any consistency, why should we trust them? Further, why should they get it right? There are thousands of variables from around the globe that can affect the economy, and just as you might think you've identified the biggest force at any one time, a bigger blast goes off, and it's travelling in the opposite direction.

Even so, I think I'm yet to convince any readers about the futility of predictions, despite my best efforts in 40% House Price Rise Unlikely and Reassuring Property Predictions. So, thankfully, David has done some for you.

His report is bleak reading for you then. It covers five aspects of the economy leading to 2012 and the results are not promising. I'll focus on the first part, which is house prices. David believes that the average price of a property will drop £13,000 by 2012 to around £185,000. He predicts a large drop in 2008 of around 20% before modest gains for 2009 to 2012.

Compare this with the National Housing Federation, which believes house prices are going to rise 40% to £300,000 by 2012. Considering house prices have already gone up by about 180% since 1999, this does seem rather steep, as predictions go.

If David's prediction comes true, what does this mean?

Existing homeowners

For existing homeowners it's actually not so bad. David shows that by 2012 a typical homeowner who bought just recently (with a 25-year repayment mortgage and no deposit) would have paid off so much of the loan by 2012 that he would then have a lower mortgage than property value. The value will have fallen from £198,000 to £185,000, but the mortgage will have gone down to £178,500, meaning he'd be in the positive by £6,500.

My own calculations show that someone with just 15 years left on his mortgage would also increase his equity by simply paying his monthly bill. His unmortgaged share of the property value would go from around £47,000 to £70,000, even though house prices fell.

Furthermore, David expects prices to rise 8% per year again after 2012, rapidly boosting any equity in the property.

First-time buyers

Obviously, first-time buyers won't be hurt by falling property prices. But, as David says in his report, `Correctly timing the purchase of a home is not easy'. I agree that it isn't easy if you're trying to predict house prices. But, as I've always maintained, you shouldn't do this. Instead, you should buy when the following criteria are met:

         You can afford it.

         You know you could still afford it if interest rates went up a few points.

         You are willing and able to stay in the property for many years, just in case your property's value falls below your outstanding mortgage.

In the meantime, keep saving a bigger deposit. You'll get on the ladder when all the conditions are met. If David is right, that could well be next year for many first-timers.

> Visit The Motley Fool Mortgage Service.