Property economist warns of 25-year slump

A property economist warns it could take 25 years for house prices to recover from a projected 35% fall. 

Bearish analyst Capital Economics said house prices would fall 35% over the next three years and provided the market was stabile, prices would not reach 2007 levels until 2036.

Capital Economics said its comments reflected the property market's overvaluation at the peak of the boom. The economists argued that even with above average house price growth, the squeeze on mortgage credit and the economic downturn will slow any recovery. 

‘This is not a forecast but an illustration…it makes the point unless you rely on another unsustainable boom the climb back [to 2007 house prices] could take a very long time,’ said Ed Stansfield, property economist for Capital Economics.

The 25-year climb back was based on the assumption house prices rise steadily by 2.4% year on year. Stansfield recognized that for house prices to act so consistently would be extraordinary. 

The economics consultancy points to the nine and six years it took for the housing market to recover after the early 1970s and 1990s downturn, respectively. Highlighting the potential for housing markets to recover Capital Economics point to the 8% to 9% annual house price growth after the early 1990s housing market crash. 

Low unemployment and a shortage of housing will not support house prices, warns Stansfield. ‘Of course they [unemployment and housing supply] are important but they are massively overplayed as an indicator,’ said Stansfield. 

Stansfield said these factors were not impacting on real economic demand, whether people can afford or want to buy a house. ‘These factors can be massively overwhelmed by short-term fluctuations in the economy,’ he said.  

Capital Economics has been criticized in the past for calling the end of the housing boom early. ‘We were the first to say the housing market had speculative bubble-like characteristics for some time…we were too early in our original prediction but ultimately not too far out,’ he said.