Today news articles reported that house prices could drop by 50% in four years. Is this likely to happen?

Headlines, headlines, headlines?..this is what this is.  The data that the journalists are reporting on is from a spread betting website, where pundits take a 'bet' on what they believe will happen to house prices over this year, next year and future years.  Do not believe these people are property professionals, most of the people that spread bet are pure speculators who do not understand the fundamentals of the house market? so they are unlikely to have any further insight into whether prices will drop that any other non property professional.  In December these same people on the IG web site were betting on a fall of over 4.5% between Christmas and March? this did not happen,, prices only dropped by a couple of %... so spread betters should not be considered in any way an authorative source of information for such forecasts.

Having said that, we must accept that such a large drop in prices is a scenario that has a material (5%) probability of occurring, but this is still small.  There is, in our view, a 95% probability of it not occurring. 

With the volume of house sale transactions dropping to the lowest in 30 years, it is becoming much harder to predict what will happen with future house prices.  The good news is that the number of people putting their houses on to the market has dropped as much as the number of people  looking to buy a property, which means that the supply demand balance has not become out of balance, with supply outstripping demand to a great degree.  If this can be maintained and repossessions do not escalate very quickly, pricing could be protected from a large drop. 

We do however see that a drop in real prices of over 5% for the rest of this year is more than 50% likely, with a drop of up to 10% being 25% likely.

The reason for these continued drops is that the credit crisis is still causing problems for first time buyers and investors through the removal of mortgage products.  The changes that have been made are fundamentally forcing people to have to put down a cash deposit, making sure that the owner has some cash in the property.  This change is unlikely to be removed quickly and hence will slow down the return of buyers to the market, so people looking to sell quickly will need to find an alternative channel like a property buyer. 

However, one challenge is that the reduction in mortgaging is also bringing about a reduction in capital available the Sale and Rent back companies, and a considerable number have stopped advertising their services on the internet.  Historically, these companies were using zero deposit mortgaging schemes to purchase their properties, but with these mortgage products removed from the market, they no longer can continue purchasing properties, so property sellers beware, please check that your buyer can get the appropriate funding to support a quick house sale.