20% price fall predicted

City traders are betting the credit crunch will trigger a 20% slump in property prices over the next two years. Derivative contracts linked to the Halifax house price index indicates the average price of a home in the UK will drop from about £200,000 to £160,000 by February 2010, when adjusted for inflation. The numbers quoted by Morgan Stanley economist David Miles are based on derivatives provided by the brokers Tradition Group. Mr Miles believes declines would be a good thing for many aspiring homeowners because they would bring property back into the reach of first-time buyers. I am at the pessimistic end of the spectrum, but I don t think it should be seen as the pessimistic end because there are as many gainers as losers, he says. Peter Sceats from Tradition s property group says strains in the financial markets are causing a gloomy outlook for housing. Traders can buy or sell derivatives contracts linked to the forward curve for property prices, depending on their outlook. The current forward curve tells us those who trade derivatives do not expect house prices to resume their previous up trend for some time, Mr Sceats says. However, Lucian Cook from Savills research department believes these figures are a bit alarmist. Remember, we are in the eye of the storm, he says, and we need to keep track of the fundamentals unlike the Nineties, unemployment is low and so are interest rates. Access to the financial market is a concern and prices could drop unless there is easing of the credit markets. Jonathan Hewlett, head of Savills London region, predicts a decrease of four per cent this year. Different markets will do different things and where there could be a possible 10 to 15% drop, somewhere else might only decrease by a few per cent, he says. When you average the figures out, you can get a very different picture, Mr Hewlett adds.