IMF Warns of House Price Falls
The IMF has warned that Britain’s housing market could be heading for a slump, with the credit crisis likely to have a “sizeable impact” on property prices.House prices in the UK have risen by up to 50 per cent more than they should have done over the past decade, leaving them dramatically overvalued, according to the International Monetary Fund’s calculations.
As a result, falling house prices are now a major threat for the UK’s economy, the IMF said.
It said there was evidence to suggest that house prices in the UK were more overvalued than in America, which is currently experiencing its worst housing slump since the Great Depression of the 1930s.
The crisis there has been driven by problems in the “sub-prime” mortgage market for people with poor credit histories, which in turn has triggered the wider global “credit crunch”.
House prices have continued to climb strongly this year, but the level of growth has slowed markedly in recent months.
The IMF’s warning will add further pressure on the Bank of England to cut interest rates following five increases since last summer.
With families facing the biggest squeeze on their disposable income in at least a decade, the prospects of a house price “correction” – either below inflationary increases or actual price falls – will cause major concern to homeowners.
The IMF said that since 1997, house prices in the UK had risen by 50 per cent more than its economic model for predicting house price growth suggested they should have.
Charles Collyns, the IMF’s expert on Europe, said some of the house price increases in Britain could be explained by so-called “economic fundamentals” such as immigration and the shortage of new homes being built. However, he added: “We are certainly concerned that the recent increases in prices have gone beyond those fundamentals.”
The IMF's analysis "suggests that the extent of house price overvaluation may be considerably larger in some national markets in Europe than in the United States, and there would clearly be a sizable impact on the housing markets in the event of a widespread credit crunch.”
Yolande Barnes, head of research at property group Savills, said: “The IMF is writing in large letters what we all were all warned about by the Northern Rock debacle. If credit is less readily available, asset prices will fall. And clearly property is chief amongst those.”
Simon Rubinsohn, chief economist at the Royal Institute of Charteres Surveyors said it was unlikely the UK would experience a price crash, but said: “The IMF is logical when it says our house prices are overvalued. We all know that they are expensive, especially in London.”
He predicts house price growth in the UK to fall from an expected 10 or 11 per cent this year, to a zero next year – a fall in real terms.
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