U.K. House Prices May Drop as Much as 20% Over Next Five Years, Niesr Says
U.K. house prices adjusted for inflation may drop as much as 20 percent in the next five years as the Bank of England raises interest rates and regulators toughen lending rules, the National Institute for Economic and Social Research said.
“The prospects for the housing market are very weak indeed over the next five years,” Ray Barrell, director of macroeconomic research and forecasting at Niesr, said at a press briefing in London yesterday. “That will significantly weaken the U.K.’s growth rate.”
While the property market recovered last year from its slump, recent housing data have signalled weakness as government spending cuts undermine consumer confidence and banks continue to rebuild balance sheets. Barrell estimates that with interest rates forecast to increase, real house prices are overvalued by 10 percent and that the combined effect of new mortgage and banking rules proposed by British and international regulators may push prices down by a further 10 percent.
Niesr, whose clients include the U.K. Treasury and the Bank of England, sees policy makers increasing the benchmark interest rate at a slower pace this year than previously forecast. It forecasts quarter-point moves in September and December to bring the key rate to 1 percent by the end of 2011, compared with a January expectation of three moves to 1.25 percent. The central bank left the key rate at a record low of 0.5 percent today, as forecast by all 43 economists in a Bloomberg News survey.
Inflation Outlook
Niesr increased its 2011 inflation forecast to 4.5 percent from 3.8 percent in January, and lowered its growth projection to 1.4 percent from 1.5 percent. The group, which published its quarterly economic review today, sees inflation slowing to 1.9 percent in 2012 as the government’s fiscal tightening weighs on the economy.
Britain’s economy grew 0.5 percent in the first quarter, barely enough to erase the snow-induced slump in the last three months of 2010.
“The underlying picture for the last six months for the U.K. has been rather poor,” Simon Kirby, a research fellow at Niesr, said at the press briefing. While “we do see some acceleration into 2012 and into 2013,” it is “weak growth.”
Niesr forecasts weaker-than-planned tax revenue, making it harder to reduce the budget deficit. The shortfall will narrow to 3.6 percent of gross domestic product in the fiscal year through March 2016, instead of the 1.5 percent expected by the government, and Chancellor of the Exchequer George Osborne will fail to balance the cyclically adjusted budget, the group said.
Housing Weakness
Niesr’s house-price forecast adds to other signs of weakness. U.K. home values fell in April for the first time in three months, Nationwide Building Society said yesterday. Property prices may be “flat” for as long as six years as first-time buyers struggle to afford a mortgage, Citigroup Inc. said last month.
Barrell cited proposed regulation by the U.K. Financial Services Authority to reduce the maximum loan-to-income ratio on mortgages in his forecast. Proposals by the Basel Committee on Banking Supervision and the U.K.’s Independent Commission on Banking may also boost borrowing costs and further curtail lending, he said.
To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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