Posted on: Friday, May 30, 2003

Overvalued house prices forecast to decline sharply

By Iain Rogers
Bloomberg News Service

LONDON — House prices in the United States, the United Kingdom and four other major economies will drop "dramatically" in the next few years, leading some of those nations to slip into recession, according to a report by the Economist magazine.

Rising home values in the United States, Britain, Spain, the Netherlands, Ireland and Australia have created a "property-price bubble," the magazine said in an e-mailed release. It collected data going back to 1975 from sources including estate agents and government agencies.

"In all those countries house prices are seriously overvalued," said Pam Woodall, economics editor at the Economist. "At some stage in the next few years, house prices in those countries will fall and when they do the consequences will be far nastier than the stock market burst."

The lowest interest rates in decades in the United States and Britain have helped drive consumer spending, which accounts for about two-thirds of the world's biggest and fourth-biggest economies.

The U.S. Federal Reserve's benchmark rate is at 1.25 percent, the lowest since 1961, and the Bank of England's key rate is at 3.75 percent, the lowest in almost five decades.

"Because interest rates are already so low, central banks have much less room than usual to cushion economies against the fall-out from a slump in house prices," the Economist report said. "If a drop in prices caused a slump in consumer spending, the Fed could not push real interest rates much lower."

The magazine advised home owners in the six countries identified as having a "bubble" to sell up and rent until prices drop. People considering buying a home should hold off until prices have fallen, the magazine said.

"Most home-owners will have to stick it out and watch their wealth dwindle," Woodall said. "Where they went wrong was in expecting double-digit returns to continue."