UK homes overvalued by 30%

Analysts at HSBC have issued a report putting forward the case that UK house prices are overvalued by around 30%.

The suggestion has raised fears that in 2008, the property market could suffer a similar slump to that experienced in the US.

The report goes on to suggest that the impending property downturn would cause sterling to plummet and force the Bank of England to reduce interest rates.

The model used by HSBC bases the fair value of housing on expected future rental growth.

Karen Ward, the report’s author, points out that on this basis: “There is around 30% of the current house price level that cannot be explained.”

The findings are similar to those of the International Monetary Fund which this October estimated that UK homes are overpriced by up to 40%.

This view was based on the discrepancy between the recent growth in house prices and the rise in economic fundamentals, such as pay, which support such growth.

HSBC believes that the credit squeeze could prove the trigger for a housing slowdown in the UK.

Higher mortgage costs could increase repossessions whilst also reducing landlords’ rental yields.

In the case of buy-to-let, the bank sees that: “A major source of demand in the past couple of years could then turn into a major source of supply.”

HSBC is also predicting that interest rates could fall far lower than expected, from 5.75% to 4.5%, by the beginning of 2009.

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