“UK House Market Overpriced” says IMF
Darren Shaughnessy, Director Kings Residential, Estate Agents in Manchester and Letting Agents in Manchester writes:
The International Monetary Fund (IMF) has warned that UK house prices are overinflated by as much as 40%. This is a stark warning when you consider that the US has seen a house market slump off the back of a lower level of house price inflation than we have experienced in the UK.
House prices in the UK are now nine times average income compared with 5 times in 2001. This kind of growth is unsustainable and clearly some level of correction is necessary. However, is it as simple as all prices will fall?
I take the view that the general public and property investors have come to view property as a straight-line ‘safe as houses’ investment. They seem to think that you can buy any property anywhere and in 7 years time the price will double. However, the property market is not as straightforward as most people think.
The entire housing market can go up or down just like the stockmarket but with much more latency and with much less volatility. It takes a very serious situation to induce a major reduction in prices in the housing market. Unlike stockmarket investors, property owners don’t typically panic sell to cut their losses. It takes a few weeks to offload a property and as most property owners actually live in their properties a reduction in prices is far less likely than price stagnation.
However, this is a global view. There are regional variations in the housing market just as there are industry sector variations in the stock market. Individual houses, streets or suburbs can over or under-perform the general market in just the same way that a company can over or under-perform on the stock market.
In the solid established suburbs where hard working people have been buying properties based on sensible multiples of their income and the mortgage payments are affordable I see no reason why there should be a major fall in prices. We may see some stagnation in the market as people become nervous of buying property. Some locations are just plain desirable. If one potential purchaser is put off there will be 2 more around the corner. Some locations are on such a strong growth curve that even in the face of general price-stagnation they will continue to see small rises in prices despite what is happening elsewhere.
There are areas where I believe we may see a fall in prices. In these places the economics do resemble the dotcom boom to an extent, however I would not predict a catastrophic reduction in prices as occurred when the dotcoms went bust. (See my article Selling on the buy to let investment dream).
I believe that a major fall in prices can only really happen when home owners HAVE to sell or are repossessed as they were in the 1980′s when the interest rates crippled homeowners. I don’t believe this scenario can happen again on this scale. Margaret Thatcher and Nigel Lawson are on record as saying that their policy of increasing interest rates with the intention of reducing inflation was flawed. Can you imagine any Chancellor is making the same mistake again?
