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Price gaps widen

Catherine Deshayes

The property price gap in 16 countries has risen beyond what their economies can support, according to the latest figures from the International Monetary Fund...

Europe is particularly badly affected with six countries - the UK, Ireland, France, Spain, Norway and Sweden having the largest house price gaps at 30 per cent.

The US may be regarded as the source of the current economic downturn but the figures show that its house price gap is only seven per cent.

The IMF house price gap figures are designed to give an indication of the potential for property prices to correct.

Its researchers looked at house price increases from 1997 to the end of 2007 and calculated how much the gains in each country could not be explained by fundamental factors such as growth in disposable income, working age population, credit and equity prices and interest rates.

'House prices in 16 countries have risen more than fundamental factors would support over the past decade,' the report says.

Historically, when house prices fall while the economy is weakening and credit conditions tightening, the economic consequences are significant, the researchers said.

They believe that the current downturn is likely to be longer because of the property bust. Looking at data going back to 1960, they found that recessions associated with house price busts and credit crunches were longer and deeper than other downturns.

'The duration of a recession is more than one quarter longer in the case of a housing bust, total output loss during the recession is somewhat higher, and the unemployment rate increases notably more and for longer in recessions with housing busts,' they wrote.

Overall in Europe the real estate industry is struggling from the growing debt burdens in many countries, the IMF has found.

In Ireland, the UK, Spain, Finland and Greece there has been a massive real estate expansion and these countries are therefore more likely to suffer from the exposure to the US sub-prime crisis.

Elsewhere household savings are generally higher and debts lower so the impact of the global credit crunch is predicted to be less widespread.

Source: www.propertywire.com