IMF says Britain heading for housing fall

The International Monetary Fund (IMF) has warned that Britain’s housing market is overvalued and could meet with a spectacular fall. The IMF, the world’s leading economic institution, reckons that British property is overvalued by as much as 40%, and the crisis with credit affecting all financial markets will have a ‘sizeable impact’ on property prices.

The IMF cited UK, Ireland and Spain as three countries with faster growing prices even than the US before its recent market collapse, thus the threesome were vulnerable to property market volatility.

The IMF’s latest World Economic Outlook report asked if a western Europe housing correction could be as deep as the US’s, and went on to say that house price overvaluation may be even larger. Since mid-2005 prices in the US have slowed considerably. The crisis this year with many borrowers left unable to meet rising interest payments caused the US property market to grind to a halt, and slip backwards. The report said: “There remains the concern that the US experience might presage steep housing downturns in other countries that have also experienced a rapid rise in house prices, with associated risks for output growth.”

The IMF report commented on British and European house prices have surged upwards beyond incomes. For instance, in the UK house prices stand at around nine times annual income. In 2001 they were only five times higher.

The IMF report added: “The steady increase in interest rates has already contributed to some cooling of these housing booms, and recent developments are likely to have a further dampening impact, particularly if credit availability were to be tightened. There would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch.”

On a more positive note the report did say that housing markets in western Europe have generally avoided the market  of ’sub-prime’ mortgages which caused so many problems in the US. In addition, factors like strong immigration and lack of housing stock are likely to continue to support prices in Britain.