House prices will fall by 30 per cent within two years, resulting in widespread allegations of misselling throughout the mortgage market, says investment bank Durlacher.
The report's author, analyst David Pannell, believes that the predicted downturn in the housing market will result in mortgage lending falling by more than half and will bring a flood of allegations of misselling.
Self-cert mortgages are tipped as highest risk as brokers will be unable to prove they gave best advice but Pannell also expects that protection products will be a problem. He suspects that clients have been churned into lower-priced life insurance with worse exclusion terms than the original policy.
Equity release is labelled by the report as “an almost mandatory misselling scandal”.
Pannell is also wary about buy to let, saying he would be surprised if all the specialist lenders survive a market downturn and that the sector is more dangerous than its small share of the overall market would indicate.
He says the four factors that will turn the housing market are tightening of underwriting criteria from lenders, decreasing financial attractions of buy to let, continued increase in interest rates and the onset of mortgage regulation which he believes will be more disruptive than expected.
The forecast is based on the fact that a 30 per cent fall in house prices would return prices to their 30-year trend line.
Pannell says: “We believe the market now has the classic features of a bubble because prices have become divorced from the underlying asset. The probability that prices will fall by more than 30 per cent is high because, historically, house price corrections tend to overshoot.
“In the 1980s, real house prices needed to fall by 26 per cent to hit trend but actually dropped by 37 per cent. If this level of over-correction were repeated during this cycle, prices would fall by 44 per cent.”