In its annual evaluation of the state of the UK economy, the IMF said house prices recovered quicker than expected after a lull in 2005.
However, it admitted it still had concerns about the UK market being overvalued and it warned there remained the potential for a downturn in prices if global rates rose and put pressure on the wider economy.
The report stated: “Following the stabilisation of house prices in 2005, house price appreciation picked up again in 2006, reflecting in part the combination of a decline in two-year bond yields and the growth of fixed rate mortgages. As a result, the ratios of house prices to average earnings and rents, which were already at historical highs, increased further. However, estimates of house price overvaluation are subject to great uncertainty.”
The IMF also admitted concerns over the increasing risks that lenders were taking on, and revealed the average loan-to-value on a lender’s book had increased by 50 per cent.
However, while it pointed out personal debt levels were rising, the stable economic picture was offsetting these fears.
“Robust economic growth, a benign interest rate environment, and a buoyant housing market have supported mortgage credit quality, though high-risk mortgage lending and bad debts on unsecured personal lending are increasing.”
Stephen Smith, director of housing at Legal & General, said: “The IMF hasn’t added anything new. It has re-stated the situation which is generally accepted – prices are up, first-time buyers are struggling and supply constraints are driving up prices. Also, the longer prices keep going up, the more likely a bump will occur. But with the recent volatility in the stock market, people with money to invest are better off putting it in property.”
