House prices to fall for five years, warns thinktank

REAL <a href="";>house prices</a> could drop by a fifth over the next five years, a leading economic forecaster warned today.

Despite prices falling since the credit crunch, houses remain overvalued by around ten per cent, the National Institute of Economic and Social Research (NIESR) claimed.

Additional regulations on banks could knock a further ten per cent off prices, after inflation, NIESR has estimated.

The boom in house prices seen from the mid-1990s was probably aided by rising mortgage to income ratios, the group argued.

Loan to income ceilings would dent prices, while higher capital requirements could raise borrowing costs by a further 0.3 per cent, NIESR said.

“Also, interest rates will have to return back to around five per cent at some point,” added NIESR’s chief economist Ray Burell.

“As rates rise, house prices will fall in real terms by two per cent a year.”

Severe headwinds will stunt prices across Europe, credit rating agency Standard and Poor’s said yesterday.

House prices in the UK will fall by five per cent this year, S&P calculated, along with gloomy forecasts for the housing markets in Spain, France and Ireland. “A first rate hike seems almost certain in the coming three months,” S&P added.