Prices too high in the South East

Houses in the South East are overvalued and there is a high risk that prices will fall, according to a new study by PricewaterhouseCoopers.

The accountancy firm looked at the ratio of house prices to incomes over the past thirty years. Researchers found that in London property is overvalued by 30 per cent, close to the 40 per cent recorded during the late-1980s boom. In the South East and South West, homes were overvalued by between 15 and 20 per cent but in the North of England and Scotland the figure was close to zero. On average, properties around the UK are 10 per cent higher than they should be.

The research suggests that in some regions, a long period of slow or even negative house price growth may be needed to restore prices to a sustainable level.

PricewaterhouseCoopers' chief economic adviser, Rosemary Radcliffe, said: "Recent rates of house price inflation are unsustainable except in the very short term and we expect a significant moderation of growth that will gradually restore house price to income ratios to more sustainable levels in the medium-to-long term."

However, she conceded that the net increase in the number of households in London and the South East is likely to outstrip the number of new homes developed over the next four years. "Given that affordability issues are most pressing in southern regions where supply constraints are also most acute, we would be cautious about predicting a significant absolute decline in UK house prices of the kind that occurred in the early 1990s," she said.