House prices are 'overvalued'
Updated on 30 July 2007
House prices in the UK are overvalued by more than 20% compared with the long-term average, a credit rating agency has warned.
Fitch Ratings said the UK had enjoyed booming house prices in recent years, while households had also taken on high levels of debt.
It warned that this combination of high house prices and debt made the UK economy one of the most vulnerable in the world to rising interest rates.
The group, which looked at house prices and debt in 16 industrialised countries, said the UK was the third most vulnerable to a combination of weakening house prices and rising interest rates, after Denmark and New Zealand.
Brian Coulton, head of global economics and Europe in Fitch's Sovereign team, said: "Given record levels of household debt, rising interest rates and after several years of strong house price inflation in many countries, Fitch has assessed a range of indicators of household balance sheet vulnerabilities and house price valuation measures. For overall vulnerability, New Zealand ranks first, Denmark second and the UK third as the most exposed countries."
The group found that property prices were most overvalued in France, with the UK having the second highest house prices in relation to incomes and Denmark having the third highest level.
It said the Norwegian economy was the most vulnerable in terms of the high levels of debt consumers had taken on, followed by New Zealand, Australia and Denmark.
The UK fared slightly better on this measure, ranked seventh out of 16 countries, because of the lower cost of servicing debt due to low interest rates and UK household's overall net worth.
But when the two measures of overvalued house prices and high debt were put together, the UK was considered to be the third most vulnerable economy.
At the other end of the scale, Fitch said Japan, Germany and Italy were the least vulnerable.
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