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House prices set to fall 20% by 2006, claims economist

The housing boom is over and the market is to fall following unsustainable price rises this year, experts are warning.

Former Bank of England adviser Roger Bootle believes property is so overvalued that a big drop may be needed to bring prices in line.

Bootle, managing director of consultancy Capital Economics, says the most likely trigger for the slowdown will be a big rise in unemployment as a result of the weak global economy rather than a rise in interest rates.

He says prices are up to 28 per cent higher than in the peak of the late 1980s and affordability according to the house price to earnings ratio has reached 5.7, up on 1989&#39s peak of 5.6.

Bootle, who was one of the “Wise Men” who provided advice to the Chancellor under the previous Conservative Government, is predicting a 20 per cent fall in prices between the end of 2003 and 2006, wiping out gains made in the second half of this year.

Meanwhile, property website Rightmove says the average house price in London has fallen by 3.5 per cent in the last six weeks to £241,358 from £249,805. It believes this trend is likely to spread to the rest of the country.

Rightmove analyst John Wriglesworth says: “The boom is indisputably over and now we are moving into the pre-Christmas lull.

“I do not expect similar house price rises in 2003 and declines in some areas and types of property, particularly at the top end of the market in London, are to be expected.”

Bootle says: “Given the recent acceleration in house price inflation, the widely shared expectation of a gentle slowdown in the housing market now looks like a best case scenario.”

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