House prices could fall another 20 per cent

Not only is the market still significantly overvalued, but the lack of mortgage credit and the weak economic outlook also point to prices falling through the remainder of this year and 2011.

Ed Stansfield, chief property economist, commented: “The outlook for house prices is one of sustained weakness. We believe that the rebound in house prices lacked any firm foundation. Thus, at the very least, we expect house prices to drop back to their early 2009 lows.

“However, with most measures suggesting that prices are still significantly overvalued, we think that house prices could well fall 20% from here.

“Judging the speed with which the second leg of the correction will unfold is difficult. If interest rates are kept at current levels for the foreseeable future, that will help to mitigate the impact of renewed rises in unemployment and the squeeze on household incomes stemming from the tightening in fiscal policy.

“All-else equal, low levels of forced selling would tend to limit the pace of house price falls.

“On the other hand, if house price expectations take a turn for the worse, or if mortgage credit conditions tighten further, that would tend to increase the pace at which house prices move back to more sustainable levels.

“For the time being, we will stick to our forecast that house prices will end the year 5% lower than they ended 2009, and fall a further 10% in 2011.”