Residential property prices in the UK are expected to fall in the second half of 2010 and are unlikely to recover in the next five years with a high chance that the real cost of homes will be less in 2015 than they were in 2007, a series of new reports reveal.

The gloomiest outlook comes in a report published today (Tuesday July 13) by Price Waterhouse Cooper which says that trends in income growth, interest rates and housing supply mean that property owners cannot rely on the price of their homes rising in value.

Its says that the average property was over valued by around 25% in the middle of 2007 and although that has now come down to around 5 to 10% prices remain vulnerable to set backs. In a stark analysis it says there is a 70% chance that real cost of a property will be less in 2015 than in 2007 and the second half of 2010 is likely to see falling house prices.

‘The possibility of a renewed fall in house prices over the next few years, particularly in real terms, cannot be ruled out as mortgage interest rates start to rise again,’ said John Hawksworth, head of macroeconomics at PWC.

‘While it can be argued in theory that house price changes have little effect on overall UK wealth, our econometric analysis suggests that an unanticipated future fall in house prices could have a significant impact in dampening the speed of the recovery in consumer spending in the medium term,’ he added.

Further gloom comes from another report from Capital Economics which says real estate prices could plunge by 25% over the next three years, wiping nearly £40,000 off the average house price. Under this scenario property values could drop to a level not seen since 2003.

Ed Stansfield, chief property economist at Capital Economics, said that ‘the huge scale of the fiscal squeeze we are about to see’, will create rising unemployment and put further pressure on household incomes that will impact on the property market.

He is predicting that property prices will drop 5% this year, followed by 10% in each of the following two years.

The June Housing Market report from the Royal Institution of Chartered Surveyors, also published today says that residential property prices are set to fall in the UK in the second half of 2010 as supply outstrips demand. One bit of good news is that sales are expected to increase.

Weaker demand and increased supply is affecting the fragile recovery in residential real estate prices, it says. Demand, as measured by new buyer enquiries, fell for only the second time since the latter part of 2008 while the net balance for new instructions rose to the highest level for three years impacting on sentiment for future price rises, it shows.

Although surveyors are still reporting house price rises in most parts of the country the increase in supply is pushing many of the regional net balances towards negative territory. The most notable exceptions to this trend are London and Scotland.

Sales are expected to rise over the coming months with the net balance remaining firmly in positive territory at 19%. During June, the average number of completed sales remained static but the average number of stocks on surveyor’s books rose by five to 67.

‘A shortage of stock has been one factor holding back transaction activity in the housing market but the abolition of HIPS is helping to belatedly address this issue. This is likely to be reflected in higher sales numbers over the coming months.

However, with supply of property now beginning to outstrip demand there is a risk of some modest slippage in prices during the second half of the year,’ said RICS spokesperson, Jeremy Leaf.