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It says in a new report that although housing is significantly riskier than index linked gilts, it offers lower risk and expected return levels than equities. The analysis includes model projections for real (CPI inflation-adjusted) growth in average UK house prices of around zero between 2007 and 2025. As house prices have fallen by around 20% since their peak in 2007, however, this does imply some real growth between 2012 and 2025, averaging around 2% per annum, the firm says.

 This reflects the fact that, while demand for housing may not be as strong as in recent decades, UK housing supply will remain constrained. A 2% average real rise would nonetheless represent a modest rate of increase relative to historic average real UK house price growth of around 4% per annum between 1984 and 2007 and around 3% pa between 1984 and 2012. PwC has extended its earlier analysis by comparing potential investment returns for housing, including net rental income, versus other assets such as equities and index linked gilts. The total real return on housing, before tax, is projected to have a median value of around 3% per annum on average in 2012 to 2025, with a 90% chance of this lying within a range of between -1% and 7% per annum over this period. At present, index linked gilts offer a secure real rate of return around 0.5% per annum, relative to CPI inflation, if held to maturity in 2025. Equities might reasonably be expected to offer returns broadly in line with long term historic real returns, which were around 5.3% per annum in the UK over the period 1900 to 2009. Currently, equity market yields in the UK are around 3.4%, so this would be consistent with real dividend growth of around 2% per annum, the report says, which is close to independent estimates of plausible trend growth in the UK economy in the period to 2025. On this basis, the PwC analysis projects average real equity returns in 2012 to 2025 of around 5.5% per annum but the historic data shows that equities are significantly riskier than housing, with a 90% chance of these being within the range -4.5% to 15.5%. 

The analysis then considers, for the sake of illustration, a 50:50 mix of index linked gilts and equities. This gives an expected real return in 2012 to 2025 of around 3% per annum with a 90% confidence interval of around -2% to 8%, both of which are very similar to housing. There remains significant uncertainty in the UK housing market and it?s likely to remain relatively subdued in the short term while economic uncertainty persists at high levels and dampens down demand.

But in the longer term, we expect supply shortages to reassert themselves given recent low levels of UK house building, pushing up house prices later this decade, said John Hawksworth, PwC?s chief economist. Our analysis suggests that the prospective return on housing in the period to 2025, while not as good as many people have got used to in recent decades, could be broadly similar in terms of both risk and expected return to a balanced mix of index linked gilts and equities,? he explained. Given that housing returns will not be perfectly correlated with returns on equities and gilts, including housing in an investment portfolio together with these other assets could have some advantages in terms of diversifying risk. 

However, any such decisions need to be based on a detailed consideration of individual investor circumstances and needs to bear in mind that housing is a potentially risky asset as recent experience makes all too clear,? he added.