How Much Will House prices fall?

Recently the drop in UK house prices accelerated. Surveyors reported the most pessimistic conditions since 1978. House prices falling at fastest rate since 1978 (link)

The house price falls are worst in areas such as Northern Ireland, the South West and East Anglia. Areas least affected include London, Yorkshire, and Scotland.

Lower prices are being driven by difficulties in the mortgage lending industry (see: can I still get a mortgage?), which have seen falls in mortgage lending by upto 40%.  The difficulties in the mortgage sector have occured because of the shortage of credit in the money markets. Many big financial institutions are experiencing grave difficulties in getting sufficient funding and the crisis may worsen before it gets better.

Will the Bank cut Interest rates?

If the Bank of England cut interest rates, then it may stem the house price falls because it would make the cost of borrowing cheaper. However, the persistence of cost push inflation makes cutting rates more difficult and so homeowners may not find mortgage rates any lower in 2008.

Factors which will prevent a crash of 1991

• Supply constraints still remain
• Interest rates are lower than in 1991. In 1991 interest rates were in double figures for several months making the cost of mortgage payments more than at present. The cost of mortgage payments is below the historical high