As an economist, it is easier for me to predict house prices in five years’ time than in a year’s time, for two reasons. First, while fundamentals drive long-term house price movements, short-term movements are driven by sentiment. For that you need a psychologist, not an economist. Second, if I predict house prices in five years’ time, people will have forgotten my prediction by the time we can assess its accuracy—although if I am right, I will remind people of it when the time comes. Shorter predictions give the reader less time to forget.
But let me take the plunge with a short-term prediction: average house prices will not fall by more than 10 per cent over the next year, and in five years they will be higher in real terms than today. At first sight this is an optimistic scenario, and for owners it is indeed a positive outlook. But for those struggling to get on the property ladder, or those putting off having a family because they cannot afford a decent place to live, it is far gloomier.
Sentiment has clearly turned down in the markets, and on some measures houses are (fractionally) cheaper than a year ago. House prices escalated to a point where supply exceeded demand, and prices fell. But we only reached that point in the last six months.
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