News: House prices could be lower in 2010 than now

Leading accountancy firm PriceWaterhouseCoopers has said faith in rising house prices might well be misplaced and property was not as safe an investment as a savings account.

The risk that house prices will be lower by 2010 than now is likely to be as high as one chance in three, and the odds would jump to two-in-three if the housing market mirrored past form since the seventies, the firm said in its UK Economic Outlook today.

PriceWaterhouseCoopers based its prediction on the ‘Monte Carlo Simulation’ which marries future prediction of house price growth with analysis of how the market has behaved in the past.

The model examines three variants of the house price model (‘Historic Parameters’, ‘Optimistic Scenario’ and ‘Main Scenario’) involving different assumptions on the degree of structural change in the housing market over the past decade or so, to generate ‘fan charts’ similar to those used by the Bank of England to project inflation.

On the main scenario, the odds of prices being lower by 2010 than now fall to one-in-three, while on the most optimistic variant of this  view this risk drops to just 7%.

On the optimistic scenario, that prices last year were still “fair”, PWC estimates odds of almost one-in-four that they will rise by another 10 to 20% by 2010, with a two-fifths chance that they will jump by 20% or more.

PWC’s study also examines the odds for prices until 2020. Because prices tend in the long-term to rise as earnings grow, it sees a virtually zero chance of house prices being lower by then than they are now on its central case.

The firm warned that people who relied wholly on house price growth to provide a financial cushion in retirement needed to consider the risk of price falls.

John Raven, senior economist at PricewaterhouseCoopers LLP, commented, “Despite the recent relative robustness of the UK housing market, potential home-buyers and investors should not underestimate its volatility in the medium term.”

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