House prices won't budge for 10 years

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%.

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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

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

Source: Halifax HPI

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!

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