House prices in Britain are likely to fall by about 15% over the next two years if conditions in the mortgage market do not improve, leading to a sharp increase in banks’ bad debts, Morgan Stanley predicted yesterday. Financial Times, The Times

A report by analysts and economists at the investment bank suggests the increased cost of mortgages due to the credit squeeze is likely to have a significant impact on property prices. If mortgage rates stabilise at their current levels, Morgan Stanley suggests house prices could fall 10% this year and about 4% next year.

This drop, which would be about 20% after adjusting for inflation and would take house prices back to early 2006 levels, would leave borrowers, who owe £164bn, with debts greater than the value of their homes, Morgan Stanley predicts. Any further rise in mortgage rates would lead to a greater drop in house prices.