Why house prices won't recover until 2024
A new report from PwC reckons house prices won't return to their 2007 peak until 2024.
During the boom of 1996 to 2007, UK house prices soared into the stratosphere.
At the end of 1995, a typical UK home cost just £61,127, according to the Halifax House Price Index (HHPI). At the end of September 2007, the same average property was valued at £200,623. In less than 12 years, the value of a typical UK home had more than tripled, boosted by a 228% rise in prices.
House of cards
Today, almost five years since house prices peaked, they remain well below the levels of mid-2007. At the end of June, a typical UK home cost £162,417, according to the HHPI. In other words, after almost half a decade, prices are still almost a fifth (19%) below their boom-time peaks -- and further weakness is expected.
What's more, the above fall doesn't take account of inflation -- the general rise in the cost of living. In the five years since house prices peaked, inflation has pushed up living costs by more than a sixth (17.3%), based on the Consumer Prices Index (CPI). Therefore, 'real' house prices, adjusted for inflation, are down nearly a third (31%) since 2007.
The notable exception to this downward trend is 'fortress London', where house prices have easily surpassed their 2007 peaks, driven higher by foreign buyers and the super-rich.
No growth until 2024
Now for even more bad news: house prices will eventually recover, but will take a long time to return to previous peaks, according to economists at PricewaterhouseCoopers (PwC).
In nominal (cash) terms, PwC expects the average UK house price to be broadly flat for the next couple of years, but then recover gradually in the second half of this decade. In nominal terms, PwC doesn't expect average prices to return to 2007 peak levels until around 2017. In other words, in cash terms, PwC expects no growth in house prices in the decade from 2007 to 2017.
In real, inflation-adjusted terms, PwC predicts that house prices will finally reach their 2007 peaks by 2024. In other words, its economists expect no real growth in house prices for 17 years from 2007 onwards. This means that homeowners who bought at the top will have to wait another 12 years before seeing a real return from their properties.
By 2015, PwC expects house prices to be around 8% below their 2007 peak levels in cash terms and nearly a quarter (24%) lower in real terms. Therefore, any growth to come in the next few years will simply make up for steep losses racked up at the end of the Noughties.
Tough times for buyers
Then again, PwC does expect tight credit conditions to ease later this decade. This easing, together with housing-supply shortages, will push up prices to almost 30% above their 2007 levels in cash terms by 2020. Even so, after accounting for inflation, prices would still be 7% below their 2007 peaks in real terms.
PwC also warns that the expected average age of first-time buyers is set to soar. It reckons that, in future, single buyers without financial assistance may not be able to buy their first homes until they are in their late thirties. Clearly, with first-timers buying later in life, the UK's owner-occupation rate is sure to slide.
No more madness
As someone who repeatedly warned from 2005 onwards of a coming financial hurricane caused by the toxic combination of cheap credit and ever-rising house prices, I'm glad that the UK has come to its senses.
Nevertheless, the last boom and bust brought our economy to the brink of collapse. It took £1.5 trillion of public money -- one year's total output for the UK -- to save our banking system in 2008/09.
I hope and pray that, after three housing boom/busts in 40 years, we property-mad Brits have finally learnt our lesson about steeply rising house prices fuelled by reckless borrowing. Otherwise, our economy may not be strong enough to survive the bursting of yet another property bubble!
More on property and mortgages:
HSBC launches lowest five-year fixed rate mortgage ever
First-time buyers need our help
When should you stop renting and buy?
Why UK house prices will fall
Why house price forecasts are dangerous
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And anyone who didn't see it coming must be wearing the beer-goggles from the mortgage-money-printing party still. Demand doesn't mean anything. We too want a mansion with acres of land and private driveway and lake, but somehow there's just no-one who'll lend us a couple of million on our £40k/yr. Funny that. Productivity value is what enables it. And until we grow it to meet the current overvaluation, we will have to gradually erode away the overvaluation. See "Japan - lost decade(s)".
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Predicting the same outcome every day/week/month for years and being right once in a while doesn't make one any more a visionary than a gambler backing red at the roulette table and being right on the fifth spin. If you only need to be correct once to impress the masses, then it makes you someone who understands probability. Inflation has an impact on any savings or investments, so when comparing the relative merits can be netted out (unless you want to use it to exaggerate the impact of the numbers you're presenting). "As someone who repeatedly warned from 2005" - House prices are up 4.75% since 2005. The FTSE 100 finished 2005 at 5619, sound like a pretty familiar number? Yep, you'd have made a bigger gain by staying invested in property because the FTSE is back where it was and house prices are up 4.75%. (Ignoring the cost of selling the house, the charges to be in the stock market and the likelihood that rent will cost more than a mortgage) Of course, I could use inflation to illustrate that the FTSE has fallen dramatically... £100K invested in the FTSE in 2005 is now "worth" £83K. Maybe I should sell my home and put the proceed in stocks and shares? Hmm I could show an upside on paper. (Not yet if I put it in a spread investment on the FTSE (even ignoring charges). I could also get evicted at the end of my current tenancy and of course I'll be paying rent until the day I die.. but why not? I might be able to show a slightly better capital gain.. Prices are also up 3% since this article in 2009: http://www.lovemoney.com/news/property-and-mortgages/buying-and-selling-property/3994/get-ready-for-the-housing-crash-part-ii and this is just one of the hundreds that Cliff has written on the same subject, generally with the same prediction.. Ahh but he was right in 2007! Hurrah! (Wrong in 2005/6/8/9/10/11&12) From Q1 2005 to Q4 2007 prices rose 20%. From Q4 2007 to the date of the above article they had fallen 13% . Of course it's easy to show a fall if you start at the peak and end at the trough.. The problem is when it takes a couple of years for the prediction to come to fruition and you've missed out on 20% rises to be correct about a 13% fall. My best guess is that prices will stay static for the next year (maybe two) but then we'll see much more gentle demand return. At the bottom of the market, there's a property price where Buy to Let is profitable because so many people (like Cliff) are happy (or have no choice to) rent. This continues to stop the bottom falling out of the market. 2000 Lithuania will win an Olympic Gold. Oops 2004 Lithuania will win an Olympic Gold. Oops 2008 Lithuania will win an Olympic Gold. Oops 2012 Lithuania will win an Olympic Gold. Yes!! You see? I was right! :-)
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PDB11 said: [B]"I hope you were not accusing me of cheerleading for house price rises."[/B] Sorry I should have made that clearer. I was using your comments as an example to Cliff. [B]"On your other point, I see people plugging Land Value Taxation (as you were doing) more and more. I find it hard to see how this could either work or be fair."[/B] Ok, let me deal with your points: [B]Calculating the tax:[/B] Most of this comes from existing data sources. [B]Planning Status:[/B] Yes this is very important. Planning applications should be restricted to those from the land owner. That way if granted the land owner makes only minimal capital gain from the application alone (unlike now) and to make any real gain he would therefore have to actually do something with this now more valuable land. [B]Council Zoning:[/B] This should be handled in a similar way to planning applications, i.e. only allowed if the owner agrees. [B]Land value tax means that people who can afford to pay pay less, whereas those who can't pay more:[/B] The underlying aim is to make land use more efficient and to use this income to reduce the burden on actually productive areas of society. If you have the situation where a person, couple or family would like to move into an area but cannot afford to do so then tough. If on the other hand we have a situation where they are already living there during implementation then I can see no reason why the full tax shouldn't become effective when they either sell or the land becomes inherited. [B]Land 'lords' charging their tenants higher rent:[/B] I really hate BTL. It's parasitic as it takes wealth from the community and rents it back to those that pay for/create it. The good news here though is that LVT is likely to mean that many BTL'ers will try and increase the rent to unaffordable levels, leading to distressed sales and more opportunities for councils and housing associations to rebuild social housing stocks. [B]Specifically, poorer people neither need nor use proportionately less land![/B] Absolutely. I would also point out that they also neither need nor use more [B]valuable[/B] land, as some social cases in London are finding out. Additionally more land use does not necessarily equal more land tax. It's charged on the total [B]value[/B] of the land and not the amount. [B]Farmers, who have a huge investment in land, would pay more[/B] Not necessarily. Agricultural land tends to be low value and in any case we could simply calculate their total business tax (+ land tax) so that that they are neither worse nor better off.
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04 April 2013