The real cost of UK property will be less in 2015 than it was in 2007, shock report reveals
Residential property prices in the UK are unlikely to recover in the next five years with a high chance that the real cost of homes will be less in 2015 than they were in 2007.
Trends in income growth, interest rates and housing supply mean that property owners cannot rely on the price of their homes rising in value, according to a report from Pricewaterhouse Coopers.
The average property was over valued by around 25% in the middle of 2007 and although that has now come down to around 5 to 10% prices remain vulnerable to set backs, the Economic Outlook report points out.
In a stark analysis it says there is a 70% chance that real cost of a property will be less in 2015 than in 2007 and the second half of 2010 is likely to see falling house prices.
‘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,’ said John Hawksworth, head of macroeconomics at PwC.
‘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,’ he added.
The PwC analysis is based on real house prices, that is the value of the property if the impact of inflation is ignored, and it says that property prices could remain below their peak levels for the next decade and this will directly affect around 3.6million people who have bought a property since house prices reached record levels in 2007.
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.
The analysis suggests that much of the impact of the trebling in house prices between 1997 and 2007 will effectively be reversed. It carries serious implications for home owners, buy to let investors and speculators who intend to treat their real estate as a pension plan. Levels of negative equity, where the value of the mortgage exceeds the property’s worth, are likely to rise sharply.
Further gloom comes from another report from Capital Economics which says real estate prices could plunge by 25% over the next three years, wiping nearly £40,000 off the average house price. Under this scenario property values could drop to a level not seen since 2003.
Ed Stansfield, chief property economist at Capital Economics, said that ‘the huge scale of the fiscal squeeze we are about to see’, will create rising unemployment and put further pressure on household incomes that will impact on the property market.
He is predicting that property prices will drop 5% this year, followed by 10% in each of the following two years.