Average UK house prices should recover later this decade, 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.

Table 1: PwC central projections for average UK house prices in real and cash terms

Source: PwC econometric model (real house prices are average of Halifax and Nationwide indices adjusted for inflation)

The PwC central scenario summarised in Table 1 above suggests that, by 2015, house prices will still be around 8% below their 2007 peak level in cash terms and around 24% lower in real terms after adjusting for inflation. In cash terms, the previous peak might not be exceeded until 2017 in this central scenario.

By 2020, the analysis suggests that a gradual easing of credit conditions, combined with housing supply shortages, could push 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 real 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 large uncertainties surrounding any such long-term projections.

John Hawksworth, chief economist at PwC, 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 eurozone 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.”

UK economic outlook – London and the South East projected to lead gradual recovery

The report projects GDP growth of around zero in 2012 as a whole, but picking up later in the year and rising to around 1.7% in 2013. Consumer spending growth of around 0.1% in 2012 and 1.3% in 2013 is expected as inflation falls back, easing the squeeze on real disposable incomes that led to a 1.1% fall in real consumer spending in 2011. Structural shifts towards online spending will continue to pose significant challenges for traditional high street retailers.

As illustrated in Figure 1.1 attached, this ‘cloudy but improving’ outlook is mirrored in many UK regions, although the sunshine may come through a bit sooner in London and the South East than in other parts of the country. The chart shows average GDP growth in 2012 and 2013 together with latest employment rates and trends in each region.

John Hawksworth, chief economist at PwC, said:

“Recovery in the UK has stalled over the past year as the eurozone 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 projected to see at least moderate average growth in 2012 and 2013. However, risks from further storms in the eurozone need to be taken into consideration and businesses should make appropriate contingency plans for this.”