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Property market in peril with houses 'overvalued by 20 per cent'
Last updated at 15:22pm on 31.07.07
The cost of a home in England and Wales rose by just 0.1 per cent in July
House prices are 20 per cent overvalued and the economy and property market are among the most vulnerable in the Western world to interest rate rises, it was claimed.
The warning came from experts in debt and risk at the respected Fitch credit rating company who have placed an alert against the British economy.
They believe a combination of unsustainable house prices, record personal debt and rising interest rates has created a potentially explosive cocktail.
The Fitch research, which assessed 16 major economies, suggests that the current average house price of some £211,000 is overvalued by more than £40,000.
It says the problem stems from the fact that house prices have risen some 210 per cent in the last ten years, while incomes have grown by a much lower 53 per cent.
Consequently, it argues that only a property crash or - more likely - many years of stagnation can possibly bring prices back into line with what people can afford.
Such is the weight of household debt on mortgages, credit cards and loans that Fitch considers Britons are particularly likely to be tipped into the red by interest rate rises. It listed the UK among three
countries which it says are "most exposed to house price and interest rate shocks".
Just such a rate shock appeared more likely yesterday as the Bank of England reported a surprising surge in mortgage lending during June.
City analysts said the findings mean the Bank is likely to go for a sixth base rate rise in a year, taking it up a quarter point to 6 per cent.
An increase is expected later this year, although it could come as early as this Thursday.
Brian Coulton, head of global economics & Europe at Fitch, said: "Looking at every measure available, UK house prices are significantly overvalued."
People have coped with the growing chasm between income and property prices by taking on record mortgages.
But rising interest rates have squeezed household budgets.
Personal debt - including mortgages - is running at a record £1.3trillion, with interest rate repayments this year expected to top £100billion for the first time.
Mr Coulton said: "For most people interest rates have fluctuated around a comfort zone since 2000. But we now have a new situation of record household debt coupled with consistent increases in interest rates.
'If we start seeing base rates above 6 per cent that could have a pronounced effect. You are then talking about rising debt default, repossessions and bankruptcies.
"At the same time, you drive buyers, particularly first-time buyers, out of the property market. That is already happening to some extent. Historically, this group accounted for 30-40 per cent of purchases, but it is now less than 15 per cent.
"When your have a shortage of buyers that will cap prices."
He added: "We don't see a repeat of the 1990s crash, but it is certainly possible that price rises could be very low for a number of years in order to bring them back into line."
Looking at house prices alone, Fitch estimates that Britain is second only to France in terms of being overvalued. However, the British face a much bigger problem because high property prices here are fuelled by big mortgages.
New Zealand comes out worst in the "at risk" league because consumers there are carrying high debts while the base rate is above 8 per cent. The Danes, who typically carry even bigger debts than the British, are second in the league.
Fitch is among a growing list of analysts who have warned that UK house prices are dangerously overvalued.
Bank of England figures show mortgage lending increased at its fastest rate for three months during June, defying expectations that the market is slowing down.
Some £31.9billion was advanced during the month, the highest figure since March.
Reader views (11)
I am pleased to say that I have now sold my property as I have worked out that I am far better off renting and earning interest on my capital for a few years. Property prices will come down as they always have after periods when they rose at unsustainable speeds.
- Mark, London, England, 31/07/2007 14:53
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Well Peter, people have been saying just the same thing for 10 years and prices keep going up. You might think you're smart by waiting but chances are you'll just never buy anywhere. While the market is being pulled up by rich buyers at the top end of the market the dwindling number of first-time buyers becomes less and less of a concern.
- Roger, London, 31/07/2007 14:23
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Houses are worth what someone is prepared to pay for them. If demand is stronger than supply, they will continue to increase in price. The London market is led by overseas buyers who do not need mortgages and by people who can afford to buy cash thanks to their bonuses. So higher interest rates will not necessarily stop the increase in prices.
Those who gloat at the prospect of a slump, should remember that it won't only be homeowners who suffer. The whole economy will suffer.
- Beatriz, London, 31/07/2007 13:28
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The people to blame for rising prices are estate agents. What a stupid system it is that let's the very people who charge a price based commission on a house sale, also be the very people who value the property!
- Philip, London, England, 31/07/2007 12:57
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For those of us who bought a long time ago: what use are high house prices? I'm not really richer. The only thing I'll ever do with a house (financially speaking) is to trade it in for another one. I can't say I'd really care if it halved in value, just as long as the one that I wanted to move to did likewise.
Advice for anyone thinking of taking on a too-many-times mortgage to "get on the housing ladder": don't. Find out what "negative equity" means from someone who's seen it before. Think about how easily more interest rate rises or losing your job could bankrupt you. Take a cold shower until sanity returns!
- Nigel, London, 31/07/2007 12:06
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I have to laugh - a terraced hovel for £200K+. There are so much nicer countries to live in where property is hugely cheaper. The internet makes this possible.
- Tony, Derbyshire, 31/07/2007 12:06
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Berlin house prices are less than a quarter of those in London. You can buy a really nice 3 bed flat there for around 150,000 euros. By any yardstick you care to mention London is incredibly expensive. Rental yields are at an all time low and yet people are still 'buying to let' expecting to make capital gains. The whole issue is infected with the same kind of madness that prevailed in the dot com stock boom and the Lawson tenure at No. 11. The higher it goes, the more it will fall.
- Neil, London, 31/07/2007 11:38
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If you don't own a property then you will still be paying rental rather than mortgage payments. Even if house prices stagnate, then you are still repaying capital (if on repayment mortgage) as well as the cost of your housing. The property market is based on factors other than house price inflation - supply and demand being a major factor in the London market.
- Helen, London, 31/07/2007 11:36
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As we have recently been informed there have been over 2 million new NI Numbers issued in the past couple of years yet no where near as many new houses so of course the prices are high. Too many people too few homes. Prices can't fall unless the situation is reversed.
- Jane, London, 31/07/2007 10:51
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In Manchester and Leeds there are now thousands of newly built flats that have been empty for months. The market is falling outside London and shows no sign of recovery.
- Lynne, Cheshire, 31/07/2007 10:34
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Greed makes people incredibly stupid on this subject. No matter what, this warning will be ignored. I look at London property prices and laugh, as a potential first time buyer there is no way I would consider buying at today's prices - it's not worth it.
- Peter We, London, 31/07/2007 09:44
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