Downside risks dominate the 2012 outlook

House prices remain overvalued on most measures. This suggests that there is ample scope for tighter mortgage credit conditions and rising unemployment to push average house prices lower during 2012. Yet at the same time, interest rates will remain very low and there is little sign that lender forbearance is easing. These factors suggest that house prices are more likely to experience a slow, drawn out adjustment than a re-run of 2008’s sharp slump. Our central forecast is for prices to drop 5% in both 2012 and 2013.