LSE economist plays down 40% house price crash fears

Ryan Bembridge

July 3, 2017

LSE economist Paul Cheshire has played down a Mail on Sunday report claiming he predicted house prices plunging by 40%.

Cheshire clarified that a 40% fall is ‘very unlikely’, adding that negative equity is unlikely to be the menace it was in the past due to more stringent mortgage lending standards since the global financial crisis.

Cheshire, who is is professor of economic geography at the London School of Economics, said: “I certainly would never have said there will be a 40% fall in house prices – I was much more nuanced than that. 40% is not impossible but it’s very unlikely.

“I said the correction would be closer to 1990 [house prices fell by 37% in 1989] than in 2008 but no one is in a position to predict a specific figure.

“But I specifically said I don’t think the negative equity problem will be as severe as in 1990 or mortgage foreclosures (repossessions) will be as bad either.

“In the last five years or so we have had much more sensible regulation of borrowing, we’ve had a smaller inflow of new buyers into the housing market.

“The government has learnt and taken steps since 2007/08 to prevent foreclosures.

“Foreclosures would put a lot of pressure on prices because that would result in forced sales.”

He did maintain that a house price correction is likely in the next two to three years however, although he clarified that within 15 years the trend will still be one of upwards growth.

He put this down to Brexit-induced foreign exchange risk as well as asset price risk, since house price growth is now more uncertain than in the past.

Cheshire explained: “The UK has a combination of rising house prices relative to incomes since the 1990s, an inelastic supply of housing and now falling real incomes – a key determinate of the demand for housing.

“In addition to the substantial rise in incomes in London over the past 15 years or so the growth of the London market has been increased by the low rates of return on traditional assets.

“Given that since the mid-1950s London house prices have more or less doubled in every decade this made London houses look a rather attractive place to park your money.

“But with Brexit where you have foreign exchange risk as well as an asset price risk – if house prices start to fall – London real estate may be seen as less of an attractive place to park money.

“House prices are still likely to rise in the long-term – over the next 15 years for example – if planning policy doesn’t change but there could be a correction in the next two or three years.”

He went on to say the Bank of England and the Treasury’s doomsday predictions before the EU Referendum were stupid but not wrong: we will see a hit to the economy just not instantly after the referendum on June 24 2016.

Inflation hit 2.9% last month while incomes grew by 2.1%.

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