Morgan Stanley: UK house price crash 'likely'

"Sharp falls in house prices may not come for a year or so, but come they probably will," said David Miles, Chief Economist at Morgan Stanley and sometime advisor to Gordon Brown. We share his view at In2Perspective. Irrational speculation on prices is likely to continue throughout 2007 as city bonuses pour into the market and banks continue to relax their lending criteria.

Miles' analysis is based on the theory that as much as half of house price gains in recent years have been speculatively driven. Purchasers have anticipated price rises and this has become self-fulfilling as double-digit growth became the norm.

The speculators will pull out of the market once prices start to slow and this will leading to sharper falls and a vicious downard spiral.

Miles estimates that at present, home buyers are expecting cash prices to continue rising by as much as 10 per cent a year, compared with 2 per cent in 1996.

These buoyant expectations of price rises, based on home owners’ experiences over the past five years, have fuelled demand and driven prices even higher.

But these forces are the hallmarks of a bubble, which will deflate rapidly once price rises fail to meet expectations.

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