As safe as houses?

New research from PricewaterhouseCoopers suggests there is an approximate one in three chance that UK house prices could be lower in 2010 than they are at present. The main threats to the housing market come from the usual suspects, namely a downturn in the confidence of would-be purchasers, as well as a general economic slowdown.

The accountancy firm has created a model of house price uncertainty that can estimate the probability of different outcomes looking forward.

Using a well-established statistical technique known as 'Monte Carlo' simulation, it examines three variants of its 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.

In its 'Main Scenario' variant, PwC's model suggests an approximate one in three chance that nominal house prices in 2010 could be lower than they are at present.

Under its 'Optimistic Scenario' variant, the chance of nominal house prices being lower in 2010 than in 2006 is only around 6%, but using the 'Historic Parameters' variant of the model, which assumes that house prices are now significantly above their equilibrium level, the probability rises to almost two in three. The report says however that the last option is probably the least plausible of the three model variants.

Going further forward it projects a chance of less than 1% that real house prices (i.e. over and above general consumer price inflation) could fail to rise by 2020 in its 'Optimistic Scenario' model variant. But the risk increases to 13% in the 'Main Scenario' variant. In this latter example, however, the most likely outcome would be a real house price rise of around 20-40% by 2020, compared to 2006 levels.

John Raven, senior economist at PricewaterhouseCoopers LLP, makes the point that despite the recent relative robustness of the UK housing market, potential home-buyers and investors shouldn't underestimate its volatility in the medium term.

2006-11-03 10:26:58 © Moneyextra.com

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