House prices to fall by 10.5% by 2015

House prices will fall by 4.5% this year and by a further 6% by 2015, says a new report from the National Institute of Economic and Social Research, making a total loss of 10.5% over the next four years.

“The prospects for the housing market are very weak indeed over the next five years and that will weaken economic growth very significantly,” said NIESR economist Ray Barrell.  “It will be the longest period of falling house prices that we have seen”.

The report adds that financial regulation of loan-to-income ratios is the best way to avoid another boom … but I wouldn’t hold your breath on that ever happening.

Real house prices will fall by 4.5 per cent in 2011 and by an average of 1.5 per cent per annum in the subsequent four years as borrowing costs rise because of tighter monetary  policy.

Research by the Institute shows that higher loan-to-income ratios for new mortgage  borrowers were a major reason for the house price boom of the 2000s that turned to bust in the financial crisis.

Supply constraints were less important than is often argued since supply  just about kept pace with household formation.

This suggests that regulation should focus on  limiting loan-to-income ratios and that increasing housing supply, as recently advocated by the OECD, would be less fruitful, although perhaps useful, and a housebuilding boom would stimulate growth.

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