Bloomberg News

U.K. House Prices to Fall to 2004 Levels, Capital Economics Says

July 13, 2011

July 13 (Bloomberg) -- U.K. house prices will decline to levels seen in 2004 as the economic recovery struggles to gain traction and consumers limit spending, Capital Economics Ltd. said in a report today.

Prices will fall 5 percent this year, 7 percent in 2012 and may decline another 5 percent in 2013, economists including Roger Bootle at the London-based researcher said in an e-mailed note today. The group also cut its forecast for growth in gross domestic product this year to 1 percent from 1.5 percent.

A rebound in house prices has faltered as the biggest public-spending squeeze since World War II and soaring inflation undermines confidence. The Bank of England left its key interest rate at a record low of 0.5 percent this month to support economic growth.

“Our views on valuation, as well as our expectations for the economy and housing-market activity levels, mean that we anticipate further falls in house prices,” the report said. “But the fact that interest rates are likely to be kept on hold may mean that the pace of adjustment is relatively slow.”

The ratio of house prices to earnings in the U.K. is at 5.1, “well above” the longer-term average of 3.7, Capital said. Other measures of value, such as the ratio of house prices to rents or to equity prices, suggest the market is 15 percent to 20 percent overvalued.

Britons’ demand for mortgages is also fading as unemployment rises, adding to pressure on the residential property market, according to the report. The Office for National Statistics said today the number of people claiming jobless benefits rose 24,500 to 1.52 million in June, the highest level since March 2010.

Recent reports on house prices have been mixed. Lloyds Banking Group Plc’s Halifax division said July 6 that prices rose 1.2 percent in June from the previous month to an average 163,049 ($263,000) pounds amid a shortage of homes available for sale. A Nationwide Building Society index showed prices were little changed last month.

--Editors: Fergal O’Brien, Philip Sanders

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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