UK house prices to slide and push rates to 50-year lows - Lehman Brothers
Monday, March 14, 2005 11:14:03 AM
forexstreet.com
LONDON (AFX) - A leading investment bank has warned that UK house prices are up to 20 pct overvalued and that upcoming price falls will eventually push the cost of borrowing to near 50-year lows by the end of next year
In a research paper entitled UK Housing Market: A Serious Case of Subsidence, Lehman Brothers said house prices are "significantly" over-valued relative to fundamentals, perhaps of the order of 10-20 pct
The restoration of equilibrium in the market will entail price falls, it added, perhaps of 3 pct in both 2006 and 2007
"In nominal terms, house prices will fall back gradually, although the volatility of the data could well mean a few months of falls being followed by a small gain," said Alan Castle, Lehman's UK economist
As a result, he is predicting that the fall in house prices will entail a sharp slowdown in consumption growth, already likely to be pressured next year by 6 bln stg worth of tax increases
Castle added that the downside-risk scenario projects a much steeper fall in house prices, and only marginal growth in consumer spending. In this scenario, Castle said there is a bigger hit to incomes from higher taxes and a negative "frenzy" effect on prices after the arguably "irrational" exuberance of recent years. House prices could fall by up to 17 pct in this scenario, he added
The effect of a fall in house prices will impact on both growth and interest rates and Castle has reduced his 2006 GDP growth forecast to 2 pct and a "significant" under-shoot of the 2 pct CPI inflation forecast
"This below-consensus, below-Bank of England growth forecast has led Lehman Brothers to pencil a series of rate cuts into forecasts, alongside a marked depreciation of sterling vis-a-vis the euro," said Castle
"Indeed, in this scenario it is envisaged that the base rate returns to its mid-2003 trough (3.50 pct) by end 2006," he added |
