What is the future for UK house prices - still waiting for Doomsday in 2013?

It is that time of year when housing market people like to have a look back over the year we have left behind and get out the crystal ball and give some insight as to what is likely to happen on fickle Planet Property.

2012 gave us the summer of sport, Felix Baumgartner jumped from Space, a politician insulted a policeman….or maybe not, the US fiscal cliff was postponed, and the much prophesised end of the world did not happen.

What people said

Many have also been predicting the end of the housing market with just as much accuracy as those interpreting the ancient Mayan calendar. There were plenty claiming that house prices would drop anything up to 50% 5 years ago.

However, as our team predicted as far back as 2008, house prices dipped before flatlining. The market corrected itself through a precipitous fall in transaction levels instead (down 70% in Scotland from peak to trough and still at only half of peak levels).

For many, 2012 continued a long and undistinguished history of inaccurate house price forecasting. However, there was a notable upturn in their expected downturn, suggesting that they were at last getting the message that House Price Doomsday was not so much postponed as averted. The general consensus was for UK property prices to fall by between 5% and 10% last year. Here at Rettie & Co., we went against the grain somewhat. We predicted that prices in Scotland would increase by 1% and that transactions would increase by 0.4%.

What actually happened

Looking at the official data from Registers of Scotland (just released), 2012 was so flat, you could have played a game of billiards on it. In fact, the housing market has been like this for a number of years (see graph below). In annualised terms, Scottish residential property prices fell by 1% over 2012, whereas transactions increased by 4%. Possibly the best indicator of the health of the market is the value of all property sold (or market turnover). This increased by 2.9% to £11.2 billion for the 12-month period, but still remains less than half the level of market activity seen in 2007.

In the wider UK, prices were also largely flat over 2012.

We were slightly optimistic with our Scottish house price forecast, but being within 2% is not that bad. A lot of our fellow professionals, however, were just embarrassingly wrong. And the problem this causes is more than just a few red faces. One of the difficulties for the property industry is that many people still think a house price crash is imminent, dampening activity and lending in the market. The fact that such forecasts have been wrong for around 10 years seems to do little to dampen the enthusiasm of those making them.

Transaction levels are much more difficult to forecast, but, again, we were in the right territory and got the direction of travel right.

Best guesses for 2013

As we enter 2013, Rettie & Co predict that transaction levels will continue to rise marginally and that average prices will continue to be relatively flat.

We have therefore only minimally adjusted our housing market forecasts produced at the end of 2011 for the next 5-year period. As well as a ‘most likely’ (central scenario), we also produce more optimistic and pessimistic forecasts, which, sensibly, give a range of possible movement in the overall market, dependent largely on future economic conditions.

Transaction levels are picking up quicker and, therefore, there is some greater adjustment here. The Bank of England’s Funding for Lending Scheme may serve to boost activity higher than this if enough of the main mortgage banks make use of this facility.

Our forecasts are provided below. The key point to note is that a housing market recovery is expected over time. Demand drivers remain strong and we still have restrictive supply. This should see prices rise again as the wider economy recovers, but not at the levels of the boom period of 2001-07.

Most of the other brave souls who forecast house prices now seem aligned with us. Our old friends at Knight Frank buck the trend by forecasting a 2% drop in prices in the UK and by over 3% in Scotland. In fact, they go further still and assume real prices not returning to 2007 peak until 2031! This shows an astonishing level of courage in not just forecasting house prices but also wider economic and inflationary conditions for a 20-year period (even the Bank of England and its divisions of economists struggle with getting inflation forecasting right one year out). For those of a strong disposition, details of the Knight Frank forecasts are here.

For what it’s worth, we think some of the gloomy forecasters place too great a reliance on economic growth and earnings in modelling and not enough on the other things that drive house prices including equity, interest rates and supply.

So there you have it, all the balls are firmly in the air for another year.