The property boom of the past ten years has left the British housing market in danger of following the slump in American house prices, the International Monetary Fund said yesterday.

In a bleak warning, the IMF found that homes in Britain were overpriced by up to 40 per cent — far more than the overpricing in the US before the current property slump began there. The finding will fuel fears over housing market prospects after growing evidence recently that prices have already begun to fall in some parts of Britain.

The warning came as it emerged yesterday that the Bank of England discussed whether to lower interest rates this month to shore up Britain’s growth. But there was substantial reluctance among the Bank’s Monetary Policy Committee to rush into lowering borrowing costs, with only one of the nine-strong panel voting for a rate reduction.

The IMF report said: “The extent of house price overvaluation may be considerably larger in some national markets in Europe than in the US. The estimates suggest that a number of advanced economies’ housing markets outside the US could be vulnerable to a correction.”

BACKGROUND

• House price gloom as the wealthy turn away

• Approvals for mortgages fall as market wanes

• Property overvalued, says MPC's Kate Barker

Multimedia

• James Rossiter on the housing market

Quietening down on the building sites

Bob the Builder. Can He Fix It? No, he can’t, the housebuilding industry is in the grip of forces outside its control

BACKGROUND

• Housing ‘will avoid crash’

• House prices‘to stay flat for years’

• Shoppers shrug off property woes

• Stormy outlook for British homeowners in Spain

• Don’t let the headlines give you nightmares

Related Links

• Bank will slash rates 'if turmoil returns’

• Misery for over-extended and over-indebted

• IMF warns of global credit crunch

House prices in Britain now stand at about nine times average annual earnings — up from about five times in 2001. Average national house prices have risen threefold since the early 1990s, from about £60,000 to about £200,000 now.

In its twice-yearly report on world economic prospects, the IMF warned Europe’s governments that the tighter lending conditions for homebuyers caused by the worldwide squeeze on credit could lead to a serious correction in excessive house prices.

“The steady increase in interest rates has already contributed to some cooling of these housing booms, and recent developments are likely to have a further dampening impact,” it said.

The IMF, however, did qualify its pessimism, saying that there were “considerable uncertainties” in its model, which did not take in key factors in Britain such as shortages of supply, boosts to prices from immigration and greater affordability due to the availability of mortgages.