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News: Rip-off house price warning

Fri, 25 May 07

The housing market in Britain is up to 65% overvalued and needs further interest rate rises to halt the surge...

The Organisation for Economic Co-operation and Development (OECD) revealed that UK property prices are among the most stretched of any major world economy, reports The Daily Mail.

At the same time, finance experts warned that the Bank of England could increase interest rates to 6% before the end of the year.

The prospect will alarm homebuyers who are already struggling to meet their monthly mortgage payments after four hikes since last August. Annual payments on an average £150,000 mortgage are already £1,200 higher than this time last year.

The Paris-based OECD said it was worried about the valuations of homes in a range of countries following a world-wide boom. It said a slowdown is long overdue and that a property crash cannot be ruled out.

Among the G7 club of rich nations, only Canadian properties are more over- stretched than the UK's levels.

Major slump may have ‘far worse’ consequences

If interest rates are not raised to slow down the economy, a major slump may do the same job - but with far worse consequences.

The OECD's report said: 'Some slackening in the pace of housing investment is likely in many OECD countries, and that may contribute to a cooling down of some fast-growing economies.

'There is always a risk, nonetheless, that it takes the form of a pronounced slump with, possibly, substantial knock-on effects to activity in the rest of the economy.'

The research in the OECD's biannual Economic Outlook compared the price of the average house with annual rental incomes.

The measure is widely used by experts because if houses do not generate enough rent, then landlords will be willing to pay less for property, pulling down prices.

Good explanations for decade-long boom

This indicator in Britain is now 65% above its historic average since 1970. An alternative-measure compares house prices with average annual incomes. This shows that UK prices are 45% higher than their long-term average, the OECD reported.

Ed Stansfield of research organisation Capital Economics said there are good explanations for Britain's decade-long house price surge, including lower borrowing costs and a shortage of new property on the market.

His own calculations suggest that the market is at least 15 to 20% overvalued. 'We are in for a very, very subdued picture in term of house-price inflation and housing market activity,' he said.

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