House prices may not rise for a decade, experts warn

Decades of stagnant or falling house prices have been predicted by one of the nation's leading accountancy firms, as estate agents and mortgage lenders also warn that the next year will see a marked weakening in the property market.

PricewaterhouseCoopers says house prices are "still likely to be below 2007 levels in 2015 in real terms" – with a risk that almost a fifth of property will have lost real terms value by that time. It adds: "Even in 2020, after five years of relatively steady growth, there is a 50 per cent chance that real house prices in 2020 could be below 2007 levels."

Sluggish growth in households' disposable income thanks to tax hikes and modest pay growth, gradually rising interest rates and the weak economic environment are blamed for keeping real-terms prices (that is allowing for inflation) depressed. PWC says that even if house prices in 2010 are on average 5 per cent higher in cash terms than last year, this still implies "fairly flat house prices" in the second half of this year given earlier increases, and little movement in real terms.

Falling property values are, although rare, not unprecedented: house prices last declined in real terms in the early 1990s and the mid-1970s. It suggests that much of the impact of the trebling in house prices between 1997 and 2007 will effectively be reversed. It carries serious implications for homeowners, buy-to-let investors and speculators who intend to treat their real estate as a pension plan. Levels of negative equity – where the value of the mortgage exceeds the property's worth – are likely to rise sharply.

John Hawksworth, head of macroeconomics at PricewaterhouseCoopers commented: "Although the average UK house price overvaluation of around 25 per cent in mid-2007 is now down to around 5 to 10 per cent despite the market rally since March 2009, our analysis suggests that house prices remain vulnerable to setbacks.

"The possibility of a renewed fall in house prices over the next few years, particularly in real terms, cannot be ruled out as mortgage interest rates rise again. While it can be argued that house price changes have little effect on overall UK wealth, our econometric analysis suggests that an unanticipated future fall in house prices could have a significant impact in dampening the speed of the recovery in consumer spending in the medium term."

The dramatic predictions come as the Council of Mortgage Lenders (CML) reported an increase in mortgage lending – up 2 per cent in May – but warned of worse to come. The CML said: "With the challenging economic backdrop, government spending cuts and forthcoming tax increases the positive trend is likely to tail off in the second half of this year. Monthly comparisons with a year earlier will probably be near zero or modestly negative over the coming month". About 42,000 home loans worth £6bn were advanced in May. The caution was echoed by the Royal Institution for Chartered Surveyors (Rics). In its latest survey, the Rics found demand for property fell since the latter part of 2008, while the net balance for new instructions rose to the highest level for three years, "impacting on sentiment for future price rises". Ten per cent more chartered surveyors reported a rise than a fall in house prices – down from 22 per cent in May. Part of the increase in supply is said to be due the abolition of Home Information Packs (Hips).

A Rics spokesman, Jeremy Leaf, said: "With supply of property beginning to outstrip demand there is a risk of some modest slippage in prices during the second half of the year."