UK house prices are still likely to be below 2007 levels in 2015 in real terms
There is a 70% chance that UK house prices will still be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in house prices in cash terms.
House prices in 2010 may on average be around 5% higher in cash terms than in 2009, but this implies fairly flat house prices in the second half of this year given earlier increases, according to PwC’s UK Economic Outlook report.
The analysis is based on a probabilistic model of UK house prices developed by PwC that allows the uncertainties in key drivers such as household income growth, interest rates and housing supply to be taken into account.
Looking further ahead, the PwC analysis presents probabilistic house price projections in both cash terms and in real terms adjusted for CPI inflation. Over the period from the peak of the market in 2007 through to 2015, the probability that cumulative house price changes will be negative is only around 15% in cash terms, but rises to around 70% in real terms. The latter is more relevant for long-term assessments of this kind and suggests that real house prices may not regain their previous peak levels until around 2020.
The analysis also highlights the high degree of uncertainty over future house price prospects, emphasising that housing is a risky asset that is not guaranteed to generate positive real returns in the future even though this has been the pattern in the past.
John Hawksworth, head of macroeconomics, PricewaterhouseCoopers LLP said: “Although the average UK house price overvaluation of around 25% in mid-2007 is now down to around 5-10% despite the market rally since March 2009, our analysis suggests that house prices remain vulnerable to setbacks.
“The possibility of a renewed fall in house prices over the next few years, particularly in real terms, cannot be ruled out as mortgage interest rates start to rise again. While it can be argued in theory that house price changes have little effect on overall UK wealth, our econometric analysis suggests that an unanticipated future fall in house prices could have a significant impact in dampening the speed of the recovery in consumer spending in the medium term.”
