PWC warns house prices will not recover until 2021

House prices will not return to their pre-crash peak until 2021 after taking into account the effects of inflation, accountants PricewaterhouseCoopers has warned.

Although the firm expects prices to rise 3pc to 4pc annually over the next four years and to be back at their 2007 high in cash terms at the end of 2014, households will have to wait a further seven years to make up the ground lost after factoring in inflation.

Currently, house prices are 18pc below 2007 levels in real terms, PwC calculated, although they are down just 3pc in headline levels. The property market has been surging back to life in recent months, on the back of the state-subsidised Funding for Lending and Help to Buy schemes.

According to Nationwide, house prices rose by 1.9pc annually in June – the fastest pace in almost three years.

PwC’s housing market outlook was part of a broader economic forecast for the UK. Building on the “signs of recovery in the first half”, it predicted growth of 1pc this year and 2pc next year – even better than the International Monetary Fund’s upgraded outlook of 0.9pc and 1.5pc.

However, PwC warned that the household squeeze would persist for year at least, as inflation again rises more rapidly than wages. It expects inflation to be around 2.7pc in 2013 and 2.4pc in 2014 – above the Bank of England’s 2pc target.

“Our main scenario for inflation implies a continued decline in real earnings growth in 2013-14, making six successive years of negative real growth,” the report said. “We would expect a gradual recovery in real earnings in 2015-17, but the level of real earnings in 2017 would nonetheless remain around 5pc below its peak level in 2008.”

High inflation will make it hard for Mark Carney, the new Bank of England Governor, to push through highly stimulative policies, like more quantitative easing. And, in another warning, for households, the economists said markets will start to price a recovery into gilt yields within “the next year or two” – pushing up market interest rates.

“Borrowers would be well-advised to lock in long-term funding at current relatively low rates where they can, while preparing for higher rates in the medium to long run,” it said.

However, PwC said it did not expect gilt yields to rise from current levels of 2.3pc to “more normal levels of around 4pc to 5.5pc” until 2025.

Source : Philip Aldrick -The Telegraph
www.telegraph.co.uk/finance/personalfinance/houseprices/10172343/House-prices-will-not-recover-until-2021.html