UK house prices are overvalued, warns OECD
By Scheherazade Daneshkhu and Jamie Chisholm, FT
House prices in the UK are “significantly overvalued” warned the Organisation for Economic Co-operation and Development on Tuesday in a new analysis of the world housing boom.
It warned of the danger of a protracted period of large house price falls with implications for a slowdown in consumer spending.
The Paris-based organisation of the world’s 30 wealthiest economies said the current housing boom was unusual because of its duration, size and the degree to which it was widespread among OECD countries.
Of the 15 countries with booming property markets, it found that only the UK, Ireland and Spain were “significantly overvalued”. This was based on large statistical models, taking into account demand and supply.
However, the OECD noted that even though the mortgage debt burden had risen, the ability to service that debt had improved since the early 1990s.
House prices had been driven upwards by relatively easy lending and low interest rates and, additionally in the UK, by demand from buy-to-let, an increase in net migration and tight supply due to restrictive planning regulations, it said.
The OECD forecast that the Bank of England’s main interest rate would remain at its current level of 4.5 per cent, although it warned that “house prices have become potentially more sensitive to even modest changes in their (interest rate) levels”.
It said there was “no compelling case” for another cut in rates after the Bank’s quarter point reduction in August, adding that an expected pick-up in exports and investment suggested “the Monetary Policy Committee can afford to wait”.
The OECD slashed its UK growth forecast for this year to 1.7 per cent from April’s forecast of 2.4 per cent, in line with consensus estimates. It stuck to its forecast for next year of 2.4 per cent, accelerating to 2.7 per cent in 2007. It once more urged Gordon Brown, the chancellor, to rein in public spending in order to curb the size of the budget deficit.
Nationwide building society’s latest report on the UK housing market said the average house price was unchanged at £157,139 in November, and that the “overall picture remained one of stability rather than acceleration”.
However, there was further evidence yesterday that the activity underlying the housing market remains fairly robust.
Figures from the Bank of England showed that mortgage approvals for house purchases rose from 108,000 in September to 113,000 in October, the tenth increase in the past eleven months.
The Bank said the amount of net lending to individuals increased by 0.8 per cent in October, or 10.2 per cent over the past 12 months, leaving the amount outstanding at £1,138bn.