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