Savills’ recently released Residential Property Focus for June 2008 warned that if the current credit crisis is not resolved in the coming year then the country could face a 25% fall in property prices over the next two years.

The report found that at the beginning of this year the credit crisis shifted the balance of supply and demand heavily in favour of supply, as the lack of mortgage availability hit those who would usually be looking to buy. The lack of credit is the over-riding factor for Savills as to whether the country suffers merely a property price correction or moves into a ‘deep and prolonged downturn’.

Savills offers two scenarios. First, if more credit was to become available over the coming year then Savills believes that small short-term falls in house prices is not a bad thing as affordability will increase. If this were to be the case then the report predicts a total fall in house prices of 10% by the end of 2009 followed by a 19% increase by 2012.

Second, as confidence in the financial sector is currently so low, there is a risk that liquidity will not be restored to the credit markets over the coming year. If this happens then Savills warns that house prices could fall by 10% by the end of the year and then by a further 15% in 2009. An increase would also be expected by 2012 and although this would be higher at 20% it would still leave house prices 5% lower than they had been five years previously.

Lucian Cook, director of residential research at Savills, told PIN: “Of the two scenarios the second is most probably the more likely at the present time. Current sentiment is negative and there is a less optimistic outlook for economic growth. People are coming to realise that the credit crunch is not going to clear overnight and we are looking at a prolonged downturn. As to how severe that downturn will be, things are finely balanced at the moment. I would hope for house prices to return to ‘normal’ by 2010.”