House prices 'could fall 20 per cent', MPs told

Property prices could fall by a further five to 10 per cent before reaching the bottom of the market, MPs have heard.

David Miles, professor of finance at Imperial College London, told the Commons Treasury committee that assuming mortgage interest rates remained "more or less the same", house prices could drop a total of 20 per cent from their 2007 peak.

But once prices stabilised they could then rise "very sharply", he said.

The committee, which met on Tuesday, was taking evidence on the economics of the housing market.

Miles said it had become increasingly clear in 2007 that house prices had moved out of line, with values "held up by the expectation that prices would keep on rising".

Expectations over prices remains the "dominant factor" in the housing market, he said, and was more important than the lack of affordable mortgages.

"There's a stand-off I think in many parts of the country between people who have got houses to sell and people who may be able to access mortgage credit, but they just can't agree on a price," he said.

Professor John Muellbauer of Nuffield College, also giving evidence, said he believed house prices would have to fall by about 20 per cent on 2007 prices in order to encourage first-time buyers back into the market.

Prices were seven to 10 per cent overvalued in 2006-07, he told the MPs, saying he believed the market is "maybe half-way" through its fall.

Muellbauer also struck an optimistic note in his analysis of the situation, describing the inflationary outlook as "very good".

The US could experience deflation within 18 months, he said, with the UK set to see inflation sharply down next year followed by a fall in interest rates.

The witnesses were sceptical about Monday's Treasury announcement that it expected banks benefiting from the government's £37bn capital injection to commit to competitive lending to homeowners at 2007 levels.

Muellbauer said the request was "a bit like asking the victim to dance on his grave", adding that it betrayed a "major misunderstanding of market forces".

Miles said he believed the Treasury comment meant only that with fresh supplies of capital the banks should not feel constrained in lending to small businesses and homeowners.