UK house-price market stays low
- There is a 70% chance that UK house prices will still be below peak 2007 levels in 2015 in real terms, despite a continued expected recovery in house prices in cash terms;
- Even in 2020, after five years of predicted relatively steady growth, there is a 50% chance that real house prices in 2020 could be below 2007 levels;
- UK economy expected to show modest average GDP growth of around 1% in 2010, picking up to around 2.2% in 2011. Public sector job cuts are expected to dampen the recovery but not derail it altogether.
House prices in 2010 may on average be around 5% higher in cash terms than in 2009, but this implies fairly flat house prices in the second half of this year given earlier increases, according to PwC's UK Economic Outlook report, published this week. The analysis is based on a probabilistic model of UK house prices developed by PwC that allows the uncertainties in key drivers such as household income growth, interest rates and housing supply to be taken into account.
Looking further ahead, the PwC analysis presents probabilistic house price projections in both cash terms and in real terms adjusted for CPI inflation. Over the period from the peak of the market in 2007 through to 2015, the probability that cumulative house price changes will be negative is only around 15% in cash terms, but rises to around 70% in real terms. The latter is more relevant for long-term assessments of this kind and suggests that real house prices may not regain their previous peak levels until around 2020.
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.
Table 1: UK house price projections and probabilities
| 2007 to 2015 | 2007 to 2020 | |||
|---|---|---|---|---|
| Cash terms | Real terms | Cash terms | Real terms | |
| Median projection for house price change in period | +11% | -6% | +30% | 0% |
| % estimated probability of house price fall during period | 15% | 70% | 3% | 50% |
Source: PwC analysis (real house prices deflated by CPI inflation). The analysis uses an average of the Halifax and Nationwide house price indices for historic data.
John Hawksworth, head of macroeconomics, PricewaterhouseCoopers LLP said: "Although the average UK house price overvaluation of around 25% in mid-2007 is now down to around 5-10% despite the market rally since March 2009, our analysis suggests that house prices remain vulnerable to setbacks.
Further fall cannot be ruled out
"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. 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."
Moderate economic recovery projected, but there could be pitfalls along the way
The report also includes projections for the wider economy showing modest average GDP growth of around 1% in 2010, picking up gradually to around 2.2% in 2011 (see Table 2 below). But there could be pitfalls along this road to recovery as the effects of past monetary and fiscal stimulus fade and as tax rises and public spending cuts take effect. In particular, the report projects consumer spending to lag behind GDP growth in the recovery phase of the cycle as credit conditions remain relatively tight, jobs are lost in the public sector and post-tax earnings growth remains subdued.
Brighter prospects for 2011
Investment should pick up from 2011, however, and export growth should also increase. But the report notes that prospects for a strong export-led recovery of the kind seen in the mid-1990s are mitigated by the fact that around half of UK exports go to relatively slow growing EU markets, while only around 7% go to the fast-growing emerging economies of Brazil, Russia, India and China.
Table 2: Summary of UK economic prospects
| Indicator | ||||||
|---|---|---|---|---|---|---|
| (% change on previous year) | OBR Budget forecasts | |||||
| (June 2010) | Independent forecasts | |||||
| (June 2010) | PwC Main scenario | |||||
| (July 2010) | ||||||
| 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | |
| GDP | 1.2 | 2.3 | 1.2 | 2.2 | 1.0 | 2.2 |
| Consumer spending | 0.2 | 1.3 | 0.5 | 1.5 | 0.5 | 1.5 |
| Investment | -0.5 | 3.9 | -1.3 | 3.3 | -0.2 | 3.2 |
| Exports | 4.3 | 5.5 | 5.2 | 6.0 | 4.0 | 5.5 |
| CPI (Q4) | 2.7 | 2.4 | 2.6 | 1.8 | 3.0 | 2.5 |
Source: Office for Budget Responsibility (22 June 2010) and HM Treasury survey of independent forecasts (average values in June survey). Investment refers to total fixed investment.
Stress-test your plans
Hawksworth concluded: "Risks to our growth forecasts are still weighted somewhat to the downside. We therefore recommend that business should stress test their plans against the possibility of a 'double dip' recession which could result in a further fall in GDP at some point over the next 18 months. This is not the most likely scenario, but it certainly cannot be ruled out.
"Looking further ahead, we would expect the pace of recovery in the UK economy in 2011 and beyond to be held back by planned tax rises and public spending cuts. We have independently estimated that the Budget plans will reduce public sector employment by around 600 000 by 2014/15, but we believe that this will dampen rather than derail the recovery due to expected stronger private sector employment growth as interest rates remain lower than would have been the case without the fiscal squeeze."
