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Housing market to recover later this decade

13 July 2012

According to the latest UK Economic Report by PwC, an average UK house prices should recover later this decade, however it is less likely to go back to their former 2007 peak levels in actual (inflation-adjusted) terms until after 2020.

The PwC central scenario implies that, by 2015, house prices will still be about 8% below their 2007 peak level in cash terms and about 24% lower in real terms after adjusting for inflation. In cash terms, the previous peak might not be surpassed until 2017 in this central scenario.

By 2020, the analysis implies that a progressive easing of credit conditions, coupled with housing supply shortages, could possibly drive average UK house prices back up to almost 30% above their 2007 levels in cash terms. However, this would still be around 7% below their 2007 peak in actual terms (once inflation has been taken into account). The 2007 real peak might not be regained until around 2024 in this central case, although there are significant worries encircling any such long-term forecasts.

Chief economist at PWC - John Hawksworth, said: "Over the next couple of years, we expect the UK housing market to remain relatively flat while economic uncertainty persists, particularly in relation to the euro zone crisis. This will also dampen down growth in consumer spending over this period.

"House prices should recover later in the decade as confidence is gradually restored, credit conditions ease for first-time buyers and underlying housing supply shortages reassert themselves. However, as house prices are likely to stay high relative to earnings by historic standards, and credit is likely to remain less readily available than before the crisis, we estimate that a single person leaving university today is unlikely to be able to afford their first house until their late 30s without financial assistance from their parents or others."

He added: "Recovery in the UK has stalled over the past year as the euro zone crisis has taken its toll. However, while official data suggests that the economy fell back into a technical recession in the first quarter of 2012, labour market and business survey data suggest continued modest growth.

"A positive development has been lower inflation, which we expect to fall back towards its 2% target rate over the next year unless there is a significant resurgence in global commodity prices. This will boost real consumer spending power, which was severely squeezed in 2011 as prices rose much faster than earnings.

"The outlook for the UK as a whole remains cloudy but with scope for improvement - with GDP broadly flat in 2012 but picking up in 2013. We expect London and the South East to lead this gradual recovery, but all regions are forecasted to see at least moderate average growth in 2012 and 2013. However, risks from further storms in the euro zone need to be taken into consideration and businesses should make appropriate contingency plans for this."