The last few days have seen a new level of pessimism in the prognosis for UK house prices. Well, at least, it’s pessimism if you are a property investor or a bank. If you are a would be first-time buyer, or believe in economic sustainability, it is good news.

According to the Nationwide, house prices fell by 1.7 per cent in July. They are now 15,000, or 8.1 per cent down on the level from a year ago. If you compare prices with Nationwides peak, seen last October, then they are now down by nearly 17,000, or 9 per cent.

House prices now only need to fall by just one more per cent, at any time over the next three months, for prices to be 10 per cent down from peak.

The Nationwide news follows a report from Standard &amp, Poor’s predicting an additional 17 per cent fall in house prices between now and next April. It says that after this fall, 1.7 million home owners will suffer from negative equity.

But, even the Standard &amp, Poor’s report seems optimistic compared to the latest predictions from Capital Economics, which reckons house prices will fall by 35 per cent from peak to trough, or by 40 per cent in real terms after taking into account the effect of inflation. They reckon prices will hit bottom in 2011.

But this is the prediction from Capital Economics to really make you sit up. Are you ready?

If prices fall by 40 per cent in real terms, then the rules of arithmetic mean they will need to rise by 70 per cent to get back to the levels seen at the previous peak. Assuming that once the recovery begins, prices rise by 2.4 per cent a year in real terms, it will take 22 years for prices to regain their 2007 level, or or 25 years if we measured the duration of the correction from that peak.

By the way, if Capital Economics is right, and house prices do indeed fall by 35 per cent, then according to figures produced by the FT in their April 26th edition, there will be 3.5 million people in the UK with negative equity.

To put that in perspective, in the early 1990s negative equity levels were less than 2 million.

Dont worry, we have been told for the last few years that there will never be another 1990s style housing price crash again; house prices only ever go up.

Just remember, we have been predicting this crash for several years. And while house prices are now at the same level seen in August 2006, if Capital Economics is right, or indeed if Standard &amp, Poor’s is right, house prices will fall way below the levels they stood at when we first warned an unsustainable bubble was in the making.

In many ways, the fall in house prices is a good thing. But there is a massive danger that it could lead to a deflationary downward spiral  as happened in Japan in the 1990s, and in the US in the 1930s. Few economists have woken up to this danger, yet.