UK house prices set to tumble

First time house buyers are on high alert over fresh fears that a steep decline in property prices could be next for the UK economy.

The warning comes from the International Monetary Fund, which advises first timer buyers on the property market to "exercise caution" as tax rises could match declining house prices.

Just two days after Gordon Brown declared the strength of the economy at Labour's conference, the IMF analysis suggests a much less optimistic forecast, in its half-yearly reading of economic trends.

It shows improvements in UK public finances, because of the 3.4 per cent growth in the economy last year, will not be enough to restore the public finances to good health.

The prized "golden rule" of the Chancellor, which he insists will not be broken, also appeared in the report as a problem alongside a sizeable government budget deficit.

"Following the large increase in the fiscal deficit in recent years, some consolidation is expected in 2004, mainly reflecting higher revenues," said the IMF.

"In 2005, and beyond, stronger fiscal conditions that presently seem in prospect would be desirable, both from a cyclical perspective and to reduce the risk of a breach in the golden rule in the future."

The outlook reveals growth in the UK of 3.4 per cent this year and 2.5 for the next, both 0.1 points lower than predicted in spring.

The main concern reiterated is that such strong economic performance could be tarnished by a steep fall in house prices that will make first time buyers particularly vulnerable.

"The central risk remains an abrupt adjustment in the housing market, where – despite signs of cooling in recent months – prices still appear higher than can be explained by developments in fundamentals."

It added: "With interest rates on a rising trend, and most house purchases financed with adjustable rate mortgages, house buyers should exercise particular caution at the present juncture."

Further warnings were expressed about a rise in rates from the BoE, which would mean the fifth hike since November last year but would allow a tighter check on inflation.

"While inflation remains low, the economy is now running at close to capacity and cost pressures are increasing; the Bank of England has appropriately raised interest rates five times since November 2003 and a continued 'early but gradual' approach appear desirable."

 

1st October 2004

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