Xmas is coming

Homeowners will lose £20,000 by next Christmas as house prices drop 10%
By SEAN POULTER
Last updated at 23:14 31 December 2007



Glimpse of the future: A slump in the housing market is indicated after ten years during which prices have doubled
An average of £20,000 will be wiped off the value of every home by next Christmas, it is claimed today.

This will be the effect of a 10 per cent fall in property prices compared with their peak in August, say analysts.

In total, this equates to a staggering £400billion fall in the bricks and mortar wealth of the nation.

The figures come from accountants at Grant Thornton, who warn the reverse is likely to deliver a huge blow to consumer confidence and, potentially, the wider economy.

House prices have more than doubled in the last ten years, creating a feeling of economic well-being and security that generated a consumer spending boom.

This boom, built on credit, kept high-street stores busy, promoted manufacturing orders and ensured the UK avoided recession.

Grant Thornton warns that a fall in house prices could have exactly the opposite effect. Homeowners will feel poorer, leading them to tighten their belts and limit their spending which could starve stores of income, threatening closures and job losses.

Senior tax partner at Grant Thornton, Maurice Fitzpatrick, said: "It appears that house prices hit their peak in August. We can expect a fall of 3 per cent by the end of 2007, followed by a further fall of 7 per cent in 2008.

"This would wipe £400billion off the value of UK residential property or an average of £20,000 per household.

"A 'burn off' of this degree of personal wealth would tend to make people more cautious about borrowing. That would damage any feelgood factor and, potentially, economic growth."

He added: "The value of a person's home is crucial in terms of the psychology of personal and financial well-being. Just as rising property prices promoted a feelgood factor and spending, so falls could have a powerful opposite effect."

Mr Fitzpatrick said his projections represent an analysis of the figures based on the "best available hard evidence".

The Bank of England's decision to cut the base rate by a quarter point in December to 5.5 per cent was intended to head off the worst effects of the credit crunch. However, City analysts believe that this falls well short of having any meaningful effect.

Many banks and building societies have refused to pass on the cut to borrowers. At the same time, they have slashed the number of mortgages they are offering, leading to a fall in the number of property sales and prices.

Experts at Capital Economics revised their forecasts to suggest price falls over the next two years will be greater than it originally anticipated.

They believe prices will fall by an average of 5 per cent in 2008 and 8 per cent in 2009, wiping out all the increases of the last 18 months.

Previously, it had forecast a fall of 3 per cent in each of these two years.

However, price falls could turn out to be good news for firsttime buyers. Chief economist at the Halifax, Martin Ellis, said: "A more subdued housing market over the next few years is a positive step for potential new entrants."

Business leaders also warned that the property market could suffer a "sharp reversal" in 2008.

Confederation of British Industry director-general Richard Lambert warned that "a sharp reversal" in house prices would have serious consequences but added that there was a risk excessively gloomy talk could fuel a deeper downturn than need take place.