Financial Times Article - House prices to fall 30 percent

28th November 2008

House prices could fall 30 per cent over the next two years in what would be the worst crash on record, according to the price of contracts being traded on the derivatives market.

Investors are betting hundreds of millions of pounds on expectations that house prices could lose nearly half their peak value, say brokers. They also suggest that the housing market will not return to today’s level of pricing for another 10 years.

Contracts being traded suggest the market will bottom out sometime in 2010, based on the Halifax house price index.

There has already been a drop of around 16 per cent in home prices so far since the market turned last year.

“There is a 45-50 per cent drop in house prices predicted peak-to-trough by trading of contracts on future house prices,” said Philip Ljubic, a property derivatives trader at Royal Bank of Scotland.

“These numbers are based off hard transactions in the market. There is serious money being wagered that this is going to be the outcome of the housing slump so it gives it some weight.”

Mr Ljubic said that 10-year contracts being traded were implying no capital growth.

Even 19-year contracts, he said, suggested capital growth of just 35 per cent in the period, which appeared to be modest given the time period in question.

The property derivatives market is pricing in falls in homes far in excess of most current forecasts.

Most commentators predict that there will be a peak-to-trough fall in house prices of between 25 and 35 per cent, but the forecasts are dependent on the type of property and the location.

Modern flats in northern cities such as Leeds, for example, are already being sold at discounts of more than 50 per cent to their newbuild value two years ago.

On Friday, Jones Lang LaSalle Residential released its market forecast, which suggested that there would be a peak-to-trough fall in UK house prices of around 29 per cent, with a decline in price of 13 to 15 per cent in 2009 and a further fall of up to 3 per cent in 2010.

The agent predicts that it will take around eight and a half years – until 2016 – for prices to recover to 2007 peak levels.

Some traders say that the movement of derivative pricing can be skewed by a number of factors.

This is particularly true at present given the relative low turnover of transactions in the market.

One banker said on Friday that banks selling derivatives to hedge their exposure to the residential market, for example, can cause significant downward pressure on pricing.