It bases its predication on the historical trend of prices falling below properties' fair value following a price boom, caused by confidence in the market remaining low.
The bank believes a fair value house price depends on a buyer's ability and willingness to afford a house, which is based on their savings and current and future earnings.It warns that UK property prices have yet to fall between 17% and 39%, based on fair valuation.
Using the Halifax House Price Index, which claims that house prices are currently around 4.8 times earnings, Numis forecasts that prices need to fall between 17% and 27% to reduce the ratio to the long-term average of 3.5 to four times earnings.
The bank also suggests that the increase in the price-to-rent ratio over the last few years implies that house prices have risen too far. House prices currently stand at 18 times rent.Numis says that house prices would need to fall 29% to adjust back to the long-term trend of 11 to 13 times, and 55% from their current levels to fall to the all-time low of eight times, which was seen in 1996.
Numis believes that current house prices are broadly the same as they were at the peak of the 1989 property bubble, and that price adjustments will take up to two more years to reach the fair value level.
