The thousands of buyers currently risking 100 per cent mortgages and borrowing up to five times their salary could be plunged deep into negative equity.
The warning has extra force because it comes from a respected expert in the field rather than yet another monthly report from a mortgage lender.
Roger Bootle, managing director of Capital Economics, was formerly chief economist at HSBC and one of the Bank of England’s ‘wise men’ who advised Chancellors under the last Tory government. He said: ‘The message is clear. Houses are now so over-valued that a prolonged period of falling prices is on the cards.’
Analysts at Capital Economics say it would take a fall of 22 per cent to bring the cost of homes back into line with what buyers can afford. A more serious slump, with prices collapsing 30 per cent, cannot be ruled out if there is a 1980s-style ‘boom and bust’ cycle.
Some London ‘hot spots’ have already seen prices marked down in recent weeks, which has been attributed to lower City bonuses and Stock Market uncertainties.
But the analysts at Capital Economics suggest that the most serious and widespread effects will not begin to be felt until late next year. They are forecasting increases of 12 per cent in 2003 before falls of 5 per cent in 2004, 10 per cent in 2005 and 7 per cent in 2006.
That would see the average price rising from around £117,000 now to £128,000 by the end of next year, then falling to £102,000 by Christmas 2006.
Such a shift would push thousands of new and recent buyers into trouble – only last week lender Bristol & West unveiled a new mortgage allowing young people to borrow up to 110 per cent of a property’s value.
The wider economy would suffer as consumers tightened their belts, spreading the gloom into the High Street and beyond. There would also be social effects, with young couples locked into small homes without the space to raise children.
Source:The Sun Nigeria