Here was what I said, back in 2004, about why the equilibrium level of house prices had risen, how far it had risen, why that meant that house prices were very considerably over-valued, and how far I thought they would fall (30%):
I was wrong, obviously. House prices stagnated from August 2004-August 2005. Then they rose again rapidly for the next two years. I was probably wrong about the factors determining the turning point - my turning point call was based on a calculation as to that level of house prices at which the monthly outlay of a first-time buyer would exceed the monthly outlay in a previous higher-inflation regime (I thought people were suffering a form of inflation illusion, wrongly believing that at lower inflation rates they could afford to pay higher house prices - see my paper on this at the end of this posting). At the point I predicted, the first-time buyers did indeed exit the market, but house prices kept rising nonetheless for reasons I have never been able to explain.
I was also, hopefully, wrong about the equilibrium level. If I was not wrong, then house price falls will be even larger than those I was predicting in 2004. It appears that we shall see soon enough...
P.S. Here was an earlier piece on some potential factors that might be leading people to pay too much for their housing (this one is technical, but the introduction is suitable for non-technical readers):
http://www.eer.co.uk/download/eehouse.pdf
UPDATE
For those of you that haven't heard or read me talk about this before, my current view of house prices is that once they have fallen 25%, it will be much clearer how far they are going to fall. Falls in excess of 40% are not altogether inconceivable. However, as things stand my expectation is between 30% and 40%, peak-to-trough, measured on the Halifax index.
