IMF warns UK house prices could fall again

The International Monetary Fund has warned there is a risk that UK house prices may fall back again in the future as prices remain high compared to past levels.

IMF researchers Deniz Igan and Prakash Loungani said the government extension on stamp duty relief helped to prop up demand in the housing market and said ‘a lot will depend on the path of economic recovery: if employment creation remains low, risks of a double dip in housing naturally increase’

The researchers said that the new, two-year exemption on stamp duty for first home purchases up to £250,000 partly explains why house prices have been so resilient in the UK but said it is worrying that ‘house prices are still high based on traditional valuation yardsticks, and policy support may not be enough to prevent further correction’.

They warned refinancing options are limited, despite historically low mortgage rates, because many homeowners are in negative equity or have higher-than-original loan to value ratios.

And they warned that the correction which has lasted two years so far could run on for another six years.

They did say that the risk of a 'double dip' is lower in the UK than in the US.

The comments were included in the in the latest world economic outlook from the fund in which it trimmed its world growth forecast for 2011 to reflect a less optimistic view on the pace of recovery in developed countries like the US and the UK. The report’s authors also warned there are still risks that even these more cautious estimates will prove too optimistic.

They now expect global activity to expand by 4.8% in 2010 and 4.2% in 2011, with a temporary slowdown during the second half of 2010 and the first half of 2011.

For the US, the IMF cut its 2010 growth forecast by 0.5% to 2.6% and said it now expects growth of 2.3% next year, down from its most recent forecast of 2.9%.  For the UK, the IMF has cut its 2011 growth target by 0.1% to 2% but lifted estimates for the current year to reflect stronger than targeted growth in the second quarter.