House prices won't budge for 10 years
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One leading forecasting firm predicts stagnating house prices for up to a decade...
House prices in five years’ time are likely to be below their 2007 peak, according to leading accountancy firm PricewaterhouseCoopers (PwC).
A dark decade for house prices?
PwC warns that, in real terms (after adjusting for CPI inflation), there is a seven-in-ten (70%) chance that house prices in 2015 will be below their 2007 peak.
What’s more, although PwC expects nominal (cash) house prices to rise modestly, there remains a 15% chance that cash prices could be lower in 2015, eight years after their 2007 peak.
PwC estimates that ten years from now, there is a 50/50 chance that house prices could be lower in real terms in 2020 than they were before the boom ended in 2007. After adjusting for CPI inflation, it expects no growth in house prices in the 13 years from 2007 to 2020.
Up, down, up, down
The firm calculates that the average house was overvalued by a quarter (25%) before the crash which began in the second half of 2007. However, following the relief rally which began in March 2009, this excess is now down to between 5% and 10%.
Related blog post
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The firm’s forecasts predict a genuine risk of a renewed fall in house prices in the next few years, likely to be driven by rising mortgage interest rates. Also, the coalition government’s austere emergency Budget could lead to 600,000 public-sector jobs lost by 2014/15, putting further downward pressure on house prices.
It’s happened before!
Thanks to flat house prices in the second half of this year, PwC expects house prices on average to end 2010 around 5% higher in cash terms than they were a year previously.
In the words of PwC, “...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.”
If you think that PwC is being wildly pessimistic in forecasting a decade of flat or falling house prices, then think again. Take a look at these data from the Halifax House Price Index (HHPI):
Average UK house price, 1989 to 1998
Eighties peak |
Q3, 1989 |
£70,233 |
First exceeded |
Q2, 1998 |
£72,587 |
Time to exceed peak |
105 months (8¾ years) |
Source: Halifax HPI
As you can see, following its Eighties peak, the average UK house price took three months short of nine years to exceed its previous high in cash terms. After accounting for inflation, the value of the average house stagnated for well over a decade.
Furthermore, Londoners who believe that this region of nearly eight million people can somehow avoid price falls across the rest of the country are also in for shock, as shown in my second table:
Average Greater London house price, 1988 to 1998
Eighties peak |
Q4, 1988 |
£105,038 |
First exceeded |
Q2, 1998 |
£109,704 |
Time to exceed peak |
114 months (9½ years) |
Source: Halifax HPI
John Fitzsimons looks at the dos and don’ts of arranging a mortgage over the internet.
As you can see, the average house price in Greater London peaked at the end of 1988, nine months ahead of the rest of the UK. However, it began to recover in the second quarter of 1998, at the same time as the nation as a whole. Thus, cash prices in London were unchanged for almost a decade and, after accounting for inflation, they were lower in 1998 than in 1988.
One final word
I can see one other event which is likely to have a big effect on future house prices: the Financial Services Authority’s proposed restrictions on mortgage lending. The FSA intends to outlaw some of the worst lending practices of the Noughties boom, such as self-certified loans and rip-off subprime mortgages.
By forcing lenders to focus on affordability, proof of income and lower-risk lending, the FSA has acted now to remove excess air from any future bubbles. Hence, we are unlikely to see a sustained boom similar to that of 1996-2007 for many, many years!
More: House prices fall for third month in a row | Sell your home online (video)
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supasup: landlords don't get their tenants to pay off their mortgage. Generally at normal interest-rate ranges, all the tenants do is cover the mortgage interest and the costs associated with maintenance and regulation (gas inspections, EPCs that no-one ever looks at, etc). The landlord is left with the mortgage debt, so unless house prices go up, BTL makes no sense financially. From this perspective, tenants get a bargain: all they have to do is pay the rent and the landlord does all the hard work of owning a house, and somehow find the capital to pay off the mortgage debt. Tenants are essentially getting a free ride off the landlord's embedded capital and exposure to risk. Any tenant who claims rents are "too high" should ask themselves how much more it would cost them to own a house, once you include repayment of the debt. The main financial reason for owning a house, besides some stability because you are not vulnerable to the landlord giving you notice, is the prospective capital gain because increases in house prices for your principal home are not taxed. If the Government taxed capital gains on all houses, as it used to do before 1965, perhaps in exchange for eliminating stamp duty, we would have a far more stable property market. There would be far less incentive to talk up prices or over-extend yourself financially (mortgage lending permitting). All those FTBs eager to join the gravy train and who complain that prices are too high would think twice about commiting themselves to buying such an expensive, costly-to-maintain and illiquid asset. If I were in government, I would do the following as regards housing: - tax capital gains on principal homes at 18% (same as for landlords). This is to discourage unsustainable booms in prices. - cut stamp duty to encourage the circulation of the market - remove the right to buy on council houses: people should buy privately, not pay a massively-subsidised price for their council house on top of their heavily-subsidised rent. - remove the right to lifetime tenancies on council houses, to encourage the circulation of stock - raise council house or housing association rents to proper market levels, to stop people on £20K+ a year living in such houses on ultra-subsidised rents, and so councils and housing association have a better income stream for maintenance and new-build. Anyone who can't afford the rents will be able to claim housing benefit, as now. - oblige all homeowners to get an EPC and annual gas safety check, as landlords have to, to improve safety and use the evidence of low insulation levels to force homeowners to insulate their houses. The Government is planning to force landlords to upgrade their F/G-rated properties, and it should do the same to homeowners. - allow landlords to deduct rental losses against earned income, rather than say rent is a special category of "investment income". - I would prefer not to subsidise housebuilding, or create ludicrous categories like "affordable homes", which are just subsidised housing for beneficiaries of the client welfare state, paid for by higher new house prices in the private sector. [b][url=/profile/supasap.aspx]supasap[/url][/b]su
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Will they or won't they? The main points that raised the housing prices was demand in part caused by too many get rich quick in the BTL market, lax bankers and self certs. Do I feel sorry for the BTL landlords who bought to many properties and now they are going to struggle on SVR? No they created the false demand in the market that pushed up prices. So yes I agree I think prices when linked to inflation will stagnate mainly as IR will rise, Repo's will rise and supply will increase. Hopefully the saving grace will be that FTB will have caught up with the notion (that you needed 7+ years ago) that you need a deposit and you can only borrow against money you actually earn, so the stagnation may not last as long as this article predicts. Comment to an earlier post. Social Housing has increased under Labour, but not via Local authorites, but under Housing Associations. Reason to try and increase VFM for the tax payer as Housing Associations only receive a proportion of the cost to build the property and borrow the rest themselves against their own balance sheet. In recent years, right to buy's have also fallen as the discount structure has changed, so there have been some net increase.
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As a caveat, I wouldn't take too seriously anything produced by a firm of chartered accountants. We all know the jokes. Social housing could be the key. If councils kicked out all the spongers and foreigners living in social housing a huge chunk of property could be released on to the market and would allow FTB's to get a cheaper start on the ladder. Being owner-occupied, those areas would then improve and become more socially acceptable. Finally the councils would save a bomb on benefits that they have to pay for the said spongers.
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12 November 2010