Britain at risk of US-style house price crash
Britain risks the prospect of a US-style crash in its house prices as the credit crunch in the financial markets takes its toll of a heavily over-valued property market, the International Monetary Fund warned today.
In its half-yearly health check of the global economy, Washington-based IMF said the housing market in the UK was even more over-priced than that in America before its recent prolonged decline.
"Housing markets have boomed in a number of fast-growing countries, most notably Ireland, Spain and the UK, with rapid price rises and sharp increases in residential investment relative to GDP exceeding even those observed during the US housing boom", the Fund said in its World Economic Outlook.
Some increase in house prices, the Fund said, was justified by changes in economic fundamentals such as lower interest rates, the rise in the number of single-person households and rising incomes.
It added, however, that the model it used showed that in the US real house prices had risen by about one-third more than explained by fundamentals and that the over-valuation in Britain was even more pronounced.
"The unexplained share of house price increases is assessed to be still larger in a number of other countries, including Ireland, the Netherlands and the UK."
While stressing that there was "considerable uncertainty" about the estimates because of factors such as immigration, the IMF concluded that "taken at face value, the estimates suggest that a number of advanced economies' housing markets outside the United States could be vulnerable to a correction."
The IMF said that five increases in interest rates from the Bank of England since August 2006 had already contributed to "some cooling" of the UK's housing boom, adding that "recent developments are likely to have a further dampening impact, particularly if credit availability were to be tightened".
The Fund sent out a gloomy message to the chancellor, Alistair Darling, as he prepares to travel to Washington for his first IMF meeting.
Labour is relying on the economy remaining strong in order to win back public support after the on-off general election saga, but the Fund said Britain's sharp increase in prices coupled with the tendency of consumers to finance spending from re-mortgaging their homes in a rising market made the UK economy especially vulnerable to a property crash.
Estate agents in the UK have been reporting falling prices for the past two months, while the monthly snapshot of the property market from the Halifax also showed a decline in prices in September.
The IMF said some easing in the UK property market was desirable but while downgrading its forecast of growth in Britain next year by 0.4 points to 2.3% it expressed concern that the correction could go too far.
"Could a housing correction in western Europe be as deep as in the US? The extent of house price over-valuation may be considerably larger in some national markets in Europe than in the US, and there would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch."
The IMF said, however, that there were reasons to believe that a crash might not materialise. Europe had not seen such a marked deterioration in lending standards as the US, where many of the loans offered to people with poor credit ratings have turned sour over the past few years. In addition, countries like Britain had seen demand for homes boosted by the arrival of overseas workers at a time when supply was constrained by strict planning laws.
"First, housing markets in western Europe have generally avoided sub-prime mortgage origination and the deterioration of lending standards observed in the US.
"Second, a number of country-specific factors, including strong immigration and supply constraints, are likely to continue to support housing sectors in particular national markets."
The Fund said the recent financial turbulence had increased the risk of a more drawn-out crisis in the US housing sector, which could spread to the wider economy.
"Tightening credit conditions could affect a broader range of households and further curtail effective demand for housing. And house prices could decline more sharply than currently expected with implications for residential investment and consumer spending."
The danger, the IMF, added was that the contagion would spread from the US to Europe. "At the same time, credit conditions may also tighten in some of the western European countries - because of their large exposures to asset-backed commercial paper and continuing strains in short-term funding markets - and this could have a significant bearing on the housing market in these countries."
Source: guardian.co.uk
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