IMF: House prices 30% overvalued

Friday, 4 April 2008 12:00 AM

Property in the UK is overvalued by as much as 30 per cent and is "vulnerable to a correction", according to the International Monetary Fund (IMF).

The UK is behind only Ireland and the Netherlands in terms of this exposure - and could follow the United States into a dramatic house price slump.

Many advanced economies have experienced a remarkably large house price boom over the last decade, prompting an inflation of prices that is unjustifiable by market fundamentals.

And, as the IMF World Economic Outlook explains: "Countries that look particularly vulnerable to a further correction in house prices are Ireland, the United Kingdom, the Netherlands, and France.

"In these economies, it is difficult to account for the magnitude of the run-up in house prices."

Indeed, the IMF argues the nations with the most advance mortgage markets are now the most vulnerable to correction.

Imaginative lending in such economies has facilitated a boom in accessible credit, which in turn has prompted the inflation in average prices.

However, this has not been matched by other market fundamentals, including -salaries, interest rates and population growth - creating a "house price gap".

It is likely this gap will close, prompting the slump in prices.

In the UK, where the average price of a property is around £180,000, this could mean a drop in value of £54,000 to around £132,000.

This leaves homeowners vulnerable to negative equity.

In 1996 the average value of a property was just £60,000, and these borrowers are likely to remain unaffected by a slump.

It is borrowers who have stretched budgets to purchase property in the last three years who now face a perilous situation - with values falling and costs increasing.

Reacting to the findings Fionnuala Earley of the Nationwide Building Society explained earlier research from the IMF had acknowledged the model used to make predictions excluded local issues.

In the case of the UK the IMF model fails to consider difference in supply between the UK and USA, and suggests this factor may support house prices in this country.

Despite this Nationwide still expects a "modest fall" in house prices this year.

The negative situation has also been exacerbated by the tightening of lending criteria in the wake of the credit crunch.

Figures released by the Bank of England yesterday show mortgage lending fell to the second lowest level on record during February, suggesting finance is now unavailable to borrowers.

Commenting on the situation, Liberal Democrat shadow chancellor Vince Cable said: "We are in the nightmare scenario where banks can't lend and people can't borrow.

"The UK economy has been running on little else than the wide availability of cheap credit for several years.

"With lending now drying up, there is a real danger this will have a serious impact on growth in the economy."

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• uk property news