Central banks should pay greater attention to housing markets when setting interest rates, the International Monetary Fund said yesterday, becoming the latest body to challenge the once dominant view that monetary policy should avoid trying to damp booms and busts in property prices. Financial Times, The Times

The comments came in an analytical chapter in the latest World Economic Outlook that suggests that many European countries are vulnerable to a substantial housing market correction.

The IMF estimates that house prices are more than 30% above fair value in Ireland, almost 30% overvalued in the Netherlands and the United Kingdom, and more than 20% overvalued in France.

The fund also notes that residential investment has been significantly above its historic trend in Spain, Denmark, France, Italy, Finland and Belgium. 'House prices in quite a few countries look overvalued relative to fundamentals,' said Simon Johnson, the IMF chief economist.