Property prices could now fall 30% warns fund manager…M&G Optimal Income fund

by Kay Murchie

Recent reports have suggested property prices in the UK could fall anywhere between 5% and 20%.

However, a leading fund manager has warned that house prices in the UK could crash by around 30% from their highest levels recorded last summer.

Richard Woolnough, who manages the M&G Optimal Income fund, said history suggests when the UK housing market crashes, it tends to fall about 25-30% from peak to trough in real terms.

But given that UK house prices increased around 270% from 1995 to the end of 2007, there is a risk that this crash could be worse, explained Mr Woolnough.

Mr Woolnough’s predictions echo those of the International Monetary Fund (IMF) who recently said UK property is overvalued by 30%.

In addition, figures from the British Bankers Association (BBA) show there were just 35,417 new mortgages approved for house purchases last month – 18% lower compared with the previous month.

Compared to March 2007, approvals were down 46% – the lowest figure for over a decade.

Mr Woolnough believes mortgage approvals are a reliable predictor of UK house prices six or seven months ahead and current data imply year-on-year falls of between 5-10% by early autumn.

A projection is likely to worsen, said Mr Woolnough, because the banks are becoming increasingly reluctant to lend, which means mortgage approvals, and therefore house prices, could fall much further.

Mr Woolnough believes the only solution is for the Bank of England to slash interest rates in order to encourage borrowing again, which will eventually revive the housing market.