Home.co.uk
Home.co.uk

News: UK housing overvalued?

Thu, 01 Nov 07

Recent analysis from the IMF on housing markets in the industrialised world has added to the debate about housing overvaluation...

In its latest World Economic Outlook, the IMF concluded that a substantial proportion of UK house price gains over the last decade could not be entirely explained by income growth, interest rates, credit growth and the working-age population.

However, this estimate of overvaluation will not account for other key drivers such as the housing supply.  A simple comparison shows that investment in residential construction accounts for a much smaller share of the economy in the UK than elsewhere, despite the fact that the population has been growing strongly and is projected to continue doing so.

As the NHPAU reminds us, the UK’s unresponsive housing supply has been instrumental in driving house prices and affordability ratios to current levels.

‘Less spectacular’ returns

Nationwide’s Fionnula Earley commented: “The IMF findings serve as a reminder that UK house prices have risen ahead of certain key fundamentals – particularly earnings. This finding is indisputable, but it does not mean that house prices are destined to fall.

“In fact, in the absence of an early 1990s-style shock to unemployment or interest rates, they are unlikely to do so. Yet, unless interest rates fall back to the lows of 2003, house prices will need to rise at a slower pace than earnings over the medium-term in order to bring housing affordability back to historical norms.

“As a result, homeowners may well need to content themselves with less spectacular returns on their houses over the next decade”.

Back to: News Index