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Scenario 1 – Generic Recession<\/strong><\/p>\n House price inflation is forecast based on the assumption that the GDP may decline by 3% with a subsequent deflationary effect on consumer price inflation.<\/p>\n The reduction in CPI inflation leads to a further drop in interest rates making goods bought on credit more affordable. In this scenario, Lightstone expects house price inflation will end the year at -3.9%<\/strong>.<\/p>\n Scenario 2 – <\/strong>Unchartered Territory<\/strong><\/p>\n “A negative house price growth of 8.8% sounds alarming, however when we look at the 2008 property crash, house price inflation dropped to as low as -5.4% during a time when economic growth only declined by 1.8%,” Lightstone said.<\/p>\n This scenario assumes a drop in GDP of 6% without a noticeable reduction in CPI inflation, leaving limited moving room for further interest rate adjustments, it said.<\/p>\n Scenario 3 – Extreme case<\/strong><\/p>\n Lightstone said that it stretched its forecast models \u2013 which was not built to perform under such extreme conditions – to its maximum.<\/p>\n It assumed a negative GDP growth of 10% with an increased reliance on expensive imports due to the weaker currency ultimately driving CPI inflation up and forcing the Monetary Policy Committee to reverse the downward interest rate cycle.<\/p>\n In this scenario, it predicts that house price inflation could end the year off at –<\/strong>14.5% but warns that under such conditions \u201call bets are off\u201d as the usual predictive interplay between GDP growth, CPI inflation, interest rates and house price inflation will start breaking down.<\/p>\n
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