House price growth prediction

Home buyers are still likely to make decent returns on their investment in the longer term despite the weakness of the current market, a study has found.

House price growth is projected to average two per cent a year in real terms between 2012 and 2025, with a lack of available homes pushing up prices later in the decade once housing demand recovers from current subdued levels, PricewaterhouseCoopers (PwC) said.

The rate would give a more modest return than the growth seen over the past 30 years, with increases of around four per cent a year between 1984 and 2007.

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But it does offer homeowners some hope compared with the situation over the past five years, as real house prices have plummeted by around a fifth since 2007, leaving many people stuck in negative equity and unable to take their next step on the housing ladder.

Lenders have also been tightening their borrowing criteria in recent months, making it tougher for people to take out a mortgage in the sluggish market.

John Hawksworth, PwC’s chief economist, said: “There remains significant uncertainty in the UK housing market and it’s likely to remain relatively subdued in the short-term while economic uncertainty persists at high levels and dampens down demand.

“But in the longer term, we expect supply shortages to reassert themselves given recent low levels of UK house building, pushing up house prices later this decade.

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“Our analysis suggests that the prospective return on housing in the period to 2025, while not as good as many people have got used to in recent decades, could be broadly similar in terms of both risk and expected return to a balanced mix of index-linked gilts and equities.”

Investing in equities alone could give an average return of 5.5 per cent over the period, although equities tend to be significantly riskier than housing, the study said.

Mr Hawksworth said: “Given that housing returns will not be perfectly correlated with returns on equities and gilts, including housing in an investment portfolio together with these other assets could have some advantages in terms of diversifying risk.

“However, any such decisions need to be based on a detailed consideration of individual investor circumstances and needs to bear in mind that housing is a potentially risky asset as recent experience makes all too clear.”