House prices could take until 2021 to reverse fall

Average UK house prices are gradually starting to recover, but are unlikely to return to their previous 2007 peak levels in real (inflation-adjusted) terms until after 2020, according to analysis by PwC in its latest UK Economic Outlook report.

The PwC central scenario suggests that, by 2015, house prices based on the ONS index will be around 7% above their 2007 peak level in cash terms, but still around 15% lower in real terms after adjusting for consumer price inflation (CPI).

By 2020, the analysis suggests that rising earnings and a gradual easing of credit conditions, combined with housing supply shortages, could push average UK house prices back up to around 35% above their 2007 levels in cash terms. However, this would still be around 3% below their 2007 peak in real terms (once inflation has been taken into account). The 2007 real peak might not be regained until around 2021 in this central case, although there are large uncertainties surrounding any such long-term projections.

Regional variations in house price trends continue to be significant. London, Eastern and Southern regions have been more stable with growth rates higher than the UK average, but Northern Ireland has seen much more volatility – house prices grew very rapidly between 1997 and 2007, but have since fallen back by nearly 60% in real terms. In London, average real house prices also grew strongly between 1997 and 2007, but have since fallen by only around 9%, which is only around half the real rate of decline for the UK as a whole. Helped by an influx of international money, London house prices are leading the current recovery in the market although it is now becoming more widespread across other parts of the country.

John Hawksworth, chief economist at PwC, said: “Over the next few years, we expect the recent gradual recovery in UK house prices to continue, although affordability will remain an issue for many first time buyers. While mortgage approvals are picking up gradually, housing completions remain subdued. And although recently introduced government initiatives to support the mortgage market are likely to boost demand in the short term, in the longer term other measures will be needed to address more fundamental problems related to lack of housing supply.

“We expect house prices to pick up at average rates of around 3-4% per annum in cash terms over the next four years, which is slightly higher on average than the consensus view. Based on our main scenario, average UK house prices might be back above their 2007 peak in cash terms as early as the end of 2014, but in real terms this might take until around 2021.”

The report projects UK GDP growth to pick up gradually to around 1% in 2013, rising to around 2% in 2014.

Hawksworth said: “After a period of generally disappointing growth in 2011 and 2012, the UK economy has shown signs of life in the first half of 2013.

“Business surveys have been particularly positive in the last couple of months and we now expect UK GDP growth to pick up to around 1% in 2013 and a near trend rate of around 2% in 2014 – if achieved, this would make us the best performing of the large EU economies. Growth rates will vary by region but they should all return to positive growth in 2013-14.

“Our main scenario for inflation implies a continued decline in real earnings in 2013-14, making it six successive years of real negative growth, but we expect to see a gradual recovery in 2015-2017. Nonetheless, real earnings in 2017 would still be around 5% below their 2008 peak level. On the brighter side, this real wage restraint should help to keep total UK employment growing at a healthy rate over the next five years, despite continued public sector job losses over this period.”

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