One in three chance that house prices will fall by 2010

there is a one in three chance that house prices will drop by 2010, according to projections from PricewaterhouseCoopers.

The financial consultant’s report considers three possible outcomes. The first is historic based on trends from the past 30 years which suggest that prices will continue to rise.

Then there is a central scenario based on the reasoning that 2005 house prices were above a fair value after the price boom in 2002, so prices should drop. There is also an optimistic scenario that assumes 2005 prices were fair and accurate.

Using the central model, PWC statistics show there is a 35% chance of a drop of up to 10% within the next three years.

When looking at the other scenarios based on past trends, PWC says there is a 65% chance that house prices will drop. But it points out that both scenarios are more unlikely than a price rise.

John Raven, senior economist at PWC, says: “Despite the rec-ent relative robustness of the UK housing market, potential home buyers and in-vestors should not underestimate its volatility in the medium term.

“For example, our detailed analysis of historic data suggests that the chance of house prices in 2010 being lower than they are today could be around one in three.”

PWC’s predictions have been calculated using the Monte Carlo simulation, a set of algorithms which studies the patterns of seemingly random information such as possible future house prices. It predicts sets of numbers too varied and complicated to have pre-determined patterns.

Peter Charles, group economist at Bradford & Bingley, says: “If you make optimistic assumptions you will get optimistic results, and if negative assumptions are made, negative results will prevail. That is what is sensible about PWC’s findings. This shows that the chance of a negative or optimistic result is small so there is little for home owners to fear.

“With the Bank of England in control of interest rates the chance of a drop similar to those seen in past decades is highly unlikely,” Charles says.

He says even a one in three chance of a price fall by 2010 – which is reasonably low – is pessimistic, adding that B&B’s figures indicate that the number is between one in six and one in 10.