Monte Carlo or bust

IF ANYONE NEEDED reminding that house prices can go down as well as up, they should take a look at a new report published today by the accountancy giant Price Waterhouse Coopers.

In contrast to more bullish recent forecasts, The UK Economic Outlook predicts a one in three risk of a UK house price fall by 2010. The report uses a new model of house price uncertainty based on the statistical technique known appropriately enough as the Monte Carlo simulation. This involves three scenarios that have different assumptions about the degree of structural change in the market over the last decade.

PwC’s favoured ‘main scenario’ puts the risk of price falls at one in three. Under the ‘optimistic scenario’ the risk falls to just 6%. But in the ‘historic parameters scenario’ (which assumes prices are significantly above their long-term equilibrium level) the risk is a sobering two in three.