The risk that house prices will be lower by 2010 than now is likely to be as high as one chance in three, and the odds would jump to two-in-three if the housing market mirrored past form since the Seventies, a leading accounting group says.

The huge uncertainties over future house prices are highlighted by a detailed analysis from PricewaterhouseCoopers (PWC), which challenges what its economists see as the dangerous misconception by many that the housing market is a “one-way bet”.

In its own “best guess” at the most likely trends in the market, PWC identifies a 35 per cent chance of prices being lower by the end of the decade than now, with a one-in-ten chance that they could drop by between 10 and 20 per cent chance from present levels.

At the same time, on this most likely “central case”, the study sees a 65 per cent chance that house prices will be higher by 2010 than now — with a 27 per cent chance that the gains will be up to 10 per cent, and a 38 per cent chance that they will be even greater.

PWC’s report looks at three separate scenarios for possible trends in the housing market and then calculates odds for what might happen to prices if these are fulfilled.

Its historic scenario, the most worrying for existing homeowners, is based on property prices behaving just as they have over the past three decades. Over that time, house prices have tended to drop sharply in the wake of a boom, falling back to a long-term level of about 3.5 times average full-time annual pay. Against that measure, house prices are overvalued by about 25 per cent compared with average earnings — so that there is now a two-thirds chance of them having fallen by 2010.

Yet PWC believes that the housing market is now unlikely to behave just as it has in the past, so this outcome is not the most probable. One key argument backing this is that prices did not crash after the property boom at the start of this decade ran out of steam two years ago.

The accounting group also agrees with the views of academic experts — including Mervyn King, the Bank of England’s Governor — that there are some good reasons to think that the property market has seen big “structural changes” that can help to justify higher valuations.

PWC therefore sets out two more sets of odds for what may happen to prices founded on this more optimistic analysis.

Its “main scenario” is based on last year’s prices being about 15 per cent above a fair value, and its “rosy” scenario based on last year’s prices being more or less at fair-value.

On the main scenario, the odds of prices being lower by 2010 than now fall to one-in-three, while on the rosiest view this risk drops to just 7 per cent.

On the optimistic scenario, that prices last year were still “fair”, PWC estimates odds of almost one-in-four that they will rise by another 10 to 20 per cent by 2010, with a two-fifths chance that they will jump by 20 per cent or more.

PWC’s study also examines the odds for prices until 2020. Because prices tend in the long-term to rise as earnings grow, it sees a virtually zero chance of house prices being lower by then than they are now on its central case.

Even if the optimism about structural changes in the market is proved wrong and prices behave as they have in the past three decades, PWC sees odds of less than 2 per cent of prices being lower in cash terms in 2020 than now, and a 50-50 chance that they will have climbed by 40 per cent or more. In real terms, it says house prices are likely to continue to rise in the long-run “but it is not a certainty”.

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