UK House Market Is 'Heading For Crash'

Source : Times Online, October 17, 2007
http://business.timesonline.co.uk/to...cle2678215.ece

The International Monetary Fund said today that soaring UK prices have rendered the market vulnerable to correction

Runaway increases in Britain’s house prices over the property boom of the past 10 years have left the housing market in danger of an American-style slump in the value of homes, the International Monetary Fund said today.

UK housing market could mirror the US slump

In a bleak warning, the IMF finds that the cost of homes in Britain and other European countries may have become much more excessive than in the United States before the present property slump began there.

Its finding will fuel fears over the housing market’s prospects after recent evidence in a series of key surveys that house prices have begun to fall in some parts of the UK.

“The extent of house price over-valuation may be considerably larger in some national markets in Europe than in the United States,” the IMF concludes. “Taken at face value, the estimates suggest that a number of advanced economies’ housing markets outside the US could be vulnerable to a correction.”

In its twice-yearly report on world economic prospects, the IMF warns Europe’s governments that tightening lending conditions for homebuyers triggered by the present worldwide credit squeeze could be the spark for a serious correction in excessive house prices.

“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,” it says.

“There would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch.”

The report notes that across the West, and in Europe in particular, house prices have charged upwards in relation to people’s incomes and also when compared with rents. In Britain, house prices now stand at about nine times annual earnings - up from only about five times in 2001.

“The largest increases in house prices relative to incomes have been experienced by France, Ireland, the Netherlands, Spain and the UK,” it notes.

In an analysis using a model of the key driving forces that can justify higher house prices, from rising incomes, to borrowing costs and population, the IMF found that across 18 rich Western nations only three-quarters of the rise in house prices over the past decade can be explained by these fundamental factors.

The unexplained 25 per cent of the rise in prices suggests substantial over-valuation and that prices could be prey to a correction.

In the UK, the IMF’s number-crunching indicated that only 60 per cent of the rise in house prices since 1997 is explained by its model of fundamental factors, leaving 40 per cent unexplained.

The Washington-based fund does qualify its assessment, however, conceding that there are “considerable uncertainties” surrounding its analysis. Its model of prices does not, for example, factor in key factors in the British market such as shortages of housing supply, boost to prices from immigration, and greater affordability owing to the availability of mortgage financing. These factors are “likely to continue to support housing sectors in particular national markets”, it concludes.

Compared with the situation in the US, which is in the grip of a severe housing market slump, the IMF also notes a number of “moderating factors” in European countries such as Britain. Unlike the US, European housing markets have largely avoided lending to financially exposed homebuyers through “sub-prime” loans, so lending standards have been higher, it notes.

If housing markets in Europe were to slump, the IMF also argues that the countries that would face the most severe economic impacts would be those where residential building booms have gone hand in hand with rising home values, boosting past economic growth. Ireland and Spain are singled out as in this category. But in the UK and the Netherlands, the construction industry has been less important to economic growth as building has been limited by planning restrictions.