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The International Monetary Fund (IMF) has issued an extremely concerning report on the worldwide housing market. The IMF believes that house prices in some of the world’s largest economies could be overvalued by an average of 12%. When you consider the average price of a UK property this equates to a potential “overvaluation” of almost £30,000. What is causing these concerns and will the market collapse?


The average UK home is now valued in the region of £230,000 with a 12% reduction equating to around £27,600. This is slightly over the average UK annual salary to put this into perspective. At this moment in time growth in property prices in the UK has slowed and London has actually moved into negative territory. However, it is worth highlighting the fact that UK house prices are still increasing although at a much reduced rate due to Brexit concerns.


Since the 2007 US sub-prime mortgage crash, worldwide interest rates have remained at near historically low levels. This in itself has made cheap funding available for financial institutions, to revive economies, leading to relatively cheap mortgages. Even though the Bank of England recently increased UK interest rates they are unlikely to move to anywhere near historic average levels any time soon. So, concerns about cheap finance will likely continue for some time to come.


The UK government’s Help to Buy scheme has been well received, allowing many people to finally climb onto the property ladder. The problem is that these schemes generally make housing available to those who would not normally be able to afford these properties. The consequence is that the increased demand, which cannot last forever, pushes prices higher and higher. Once the government’s Help to Buy scheme ends, the extra premium forced onto house prices will push them even further out of the range of future first-time buyers.


Interestingly, the IMF spoke in great depth about rent controls, something which the Labour government has been touting. The IMF believes that any form of rent control will lead to an increase in property prices, creating a lock in effect that sees many renters in accommodation which exceeds their needs.

This would be a little ironic, assistance for tenants from a future Labour government actually playing into the hands of property investors by pushing the value of their assets higher. In many ways, a degree of rent control takes away the uncertainty of the unknown. In any investment market, secure cash flow is the key and rent controls would reduce the risk/reward ratio and potentially push house prices higher.


It depends which experts you speak to as to whether they believe the UK property market is undervalued, fair value or overvalued. The fact is that the market dictates the price, based on supply and demand, although cheap finance and government assistance continue to have a major impact. The suggestion that UK house prices could be overvalued to the tune of 12% is alarming but no government could ever allow house prices to fall by that amount. They would simply be voted out of power!

As a consequence, in a worst-case scenario we may well see a slow deflation of the UK house price bubble (assuming there is an actual bubble). The problem is, with interest rates so low, finance so cheap and minimal bank deposit returns, many investors will again turn to property.

Source: Property Forum

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