House prices have diverged from the levels that might be justified by income fundamentals in six
periods over the last 35 years, but none of these episodes can be explained by the same set of
factors. This is why we do not forecast house prices using an econometric model that assumes
relationships are constant over long periods. Instead, we focus on the fundamentals and other
issues which are most relevant to the market at the time. Applying this analysis now suggests that
house prices will fall further from here – by at least 5% and perhaps as much as 10%.
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