Homes still likely to show return on investment

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Home buyers are still likely to make decent returns on their investment in the longer term despite the weakness of the current market, a study has found.

House price growth is projected to average two per cent a year in real terms between 2012 and 2025, with a lack of available homes pushing up prices later in the decade once housing demand recovers from current subdued levels, PricewaterhouseCoopers (PwC) said.

The rate would give a more modest return than the growth seen over the last 30 years, with increases of around four per cent a year between 1984 and 2007.

But it does offer homeowners some hope compared with the situation over the last five years, as real house prices have plummeted by around a fifth since 2007, leaving many people stuck in negative equity and unable to take their next step on the housing ladder.

Lenders have also been tightening their borrowing criteria in recent months, making it tougher for people to take out a mortgage in the sluggish market.

A landlord with a buy-to-let property could expect an average real return of three per cent a year before tax but after running costs between 2012 and 2025, the study suggested.

Much of this added value would come from rents, which have soared in recent months as people have become trapped in the rental sector because they have been unable to raise a deposit or meet borrowing criteria.

Figures from the Council of Mortgage Lenders showed that buy-to-let lending had increased by nearly a fifth in the space of a year, although lending volumes were still at about a third of their peak in 2007.

The PwC study found that by comparison, a 50/50 mix of index-linked gilts and equities were likely to give a similar return to housing over the next 13 years, with an expected real return of around three per cent a year.