IMF – housing market facing a slump

Permalink: IMF – housing market facing a slump
by Kay Murchie

The International Monetary Fund (IMF), the world’s leading economic institution, has commented that property in the UK is overvalued by 40%. IMF said it is likely that the credit crunch will have a huge affect on house prices which could prompt a slump.

According to the IMF, house price increases in the UK, Ireland and Spain have been rising quicker than those in the US prior to the recent market collapse. Consequently, these countries are particularly exposed to market volatility.

In its latest World Economic Outlook report, it asked the question ‘could a housing correction in western Europe be as deep as in the United States?’ Its analysis suggests that house price overvaluation may be significantly larger and there would be a substantial impact on the housing markets in the event of a widespread credit crunch.

In the US, property prices have slowed considerably since mid-2005. Together with a rise in borrowing costs, many homeowners were unable to make monthly repayments on their mortgages.
IMF commented that concern remains that the US events might prompt housing slumps in other countries that have also experienced significant increases in property prices.

In the UK, interest rates have increased 5 times since August 2005 and this steady increase has already had an affect on cooling some of these housing booms. There would clearly be a sizeable impact on the housing markets in the event of a widespread credit crunch.

However, the report does provide some hope to worried homeowners by observing that property markets in western Europe have generally avoided the sub-prime mortgage market which has collapsed in the US.

Finally, lack of housing stock and strong immigration are likely to support property prices in the UK.