House prices 'to fall 5.5% then rise again', as top economist warns of recession

UK Daily Mail
Monday January 28, 2008

A top economist warned today that the UK risked falling into a full-blown recession as it entered its weakest period of growth for more than 15 years.

Roger Bootle, adviser to accountants Deloitte, said he expected the UK economy to grow by 2 per cent this year and 1.7 per cent the next, the lowest two-year growth rate since 1992.

But he said there was a real risk that plummeting house prices amid the credit crunch, coupled with sluggish job growth during the prolonged slowdown, could send the country into recession.

His warning came as the Centre for Economics and Business research predicted Britain will this year experience its first annual fall in house prices since 1995, according to a new study.

The average is forecast to fall £11,000 to £188,000, but after this 5.5 per cent fall, it expects prices to begin climbing again in 2009.

Both predictions will put heavy pressure on Bank of England boss Mervyn King to slash interest rates.

Mr Bootle claimed monetary chiefs should be prepared to reduce them by 1.5 per cent to 4 per cent within two years to try and avert the downturn.

Comparing the looming slowdown to the last one between 2004/05, he said this one would be a "fundamental period of adjustment" rather than a "pause for breath" before quick recovery seen three years ago.

Mr Bootle, formerly group chief economist at banking giant HSBC and now managing director of Capital Economics, said: "The increasing vulnerability of the housing market is at the heart of the downturn.

"Admittedly, the UK economy escaped a major economic downturn in 2004/05, when the housing market experienced its first ever 'soft' landing.

"But the 'big one' might now finally be upon us."

Mr Bootle was writing in the Deloitte Economic Review.

Meanwhile, the CEBR identified three factors driving price falls. The first is the credit crunch which "will continue to restrict mortgage approvals".

The second is that homes are over-valued because prices have risen ahead of what buyers can afford to pay.

"Third, households are grappling with squeezed personal finances, following last year's interest rate rises, high inflation, tax increases and relatively weak wage inflation."

But the scale of the dip in prices will be limited due to a housing shortage, the likelihood that interest rates will be cut several times this year and more immigration.