Are immigrants to blame for soaring house prices?

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Those immigrants, eh?

If they're not stealing our jobs, they're taking our women. Throwing them over their shoulders, into the boot of their two-door Trabants and over the border into whatever godforsaken kleptocracy they first came from.

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But now they're taking the blame for doing something far worse. From the Polish chippies on Tyneside building sites, to the thousands of French workers in the City, they all have one thing in common - they're pushing up the price of houses.

Or are they?

As everyone knows already, house prices in the UK have boomed in the past decade. And according to a report from the National Housing Federation earlier this week, they'll rise by another 40% by 2012, as low levels of building, high levels of immigration and low rates prolong the greatest bull market of our time. More people means more demand, which means upward pressure on house prices is set to continue.

Even Rod Liddle in The Spectator recently argued that "we need new homes only to house those people who move to live here from abroad."

Now we don't want to get into the politics of immigration here - that's not our remit. But in terms of the economics of the housing market, the impact of immigration has been hugely over-exaggerated - largely by vested interests who are hoping to see the property bubble last for as long as possible.

As arguments go, the old supply and demand one is pretty compelling. You can't argue with basic economics. But here's the key fact that proves that there isn't a physical housing shortage. If immigrants (or anyone else for that matter) are pushing up the price of houses, they should also be doing the same to rents. A high level of demand for rental property coupled with a shortage of supply should mean that upward pressure is being applied to rental prices. But as investment bank ABN Amro pointed out in a recent report, that hasn't happened. Rents have remained relatively steady over the past decade. So steady in fact, that relative to rents "UK house prices look inflated by nearly 50%."

So the housing bubble has nothing to do with immigration, or what we would call natural demand' - people buying houses to live in them. It is in fact, down to cheap money and rampant speculation. If you're a first time buyer locked out of the market, and you want to know the culprit, you need look no further than the buy-to-let investor.

Back in the late 1990s, buy-to-let accounted for about 1% of loans taken out for the purposes of buying a house. Today, these property speculators account for 9% of outstanding home loans. In 2006, 330,000 buy-to-let mortgages were taken out, making it the fastest growing part of the housing market. And it's all helped to make the UK one of the world's most overvalued and vulnerable property markets.

The Ernst & Young ITEM (Independent Treasury Economic Model) Club calculate that property prices are now overvalued to the tune of 16%. Credit ratings agency Fitch reckons 20%. According to research the group recently carried out, the current average house price of £211,000 is overvalued by more than £40,000, putting the UK among three countries of 16 they surveyed that "are most exposed to house price and interest rate shocks."

"At every measure available, UK house prices are significantly overvalued," says Brian Coulton, head of Global Economics & Europe at Fitch. And just as a pin pricks an overblown balloon, the housing bubble's pin is just over the horizon - rising interest rates.

Any research that predicts rising house prices for the years ahead automatically assumes that the low interest rate environment that we have experienced since 2000 will continue. However, as Roger Bootle of Capital Economics recently pointed out, and as the Bank of England's inflation report confirmed yesterday, the Monetary Policy Committee hasn't stopped raising rates.

In fact "the Committee is just pausing for breath. I believe that interest rates will rise to 6%, perhaps as soon as next month." And with inflation still running ahead of the 2% target (it was 2.5% in July), they may go further. "The upshot is that the MPC's work is not yet done. I think that the Committee will raise interest rates at least once more to 6%. And it is possible that interest rates will eventually have to rise above 6% in order to slow economic activity and bring the public's inflation expectations back in line with the 2% inflation target," he wrote in a recent note.

And if that happens, "you are then talking about rising debt default, repossessions and bankruptcies", says Coulton. Nearly two million homeowners will start coming out of short-term fixed-rate mortgages in the next 18 months. They'll find that with rates 1.25% higher, their bank managers will be far less generous with them when renegotiating mortgages than they were when they first took one out two years ago.

And then things will really start getting ugly.

Turning to the wider markets...

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In London, stocks made strong gains again yesterday as investors were cheered by the good start on Wall Street, the latter due to positive comments on economic growth from the US central bank. The FTSE 100 index closed just off session highs at 6,393, an 85-point gain. Mortgage bank Alliance and Leicester performed well on M&A talk, as did peers Northern Rock and Bradford and Bingley. Staying within the financial sector, insurance stocks were boosted by strong results for Royal & Sun Alliance. For a full market report, see: London market close.

The positive start on Wall Street helped investor sentiment elsewhere in Europe too. In Paris, the CAC-40 was 128 points higher, at 5,749, whilst the Frankfurt DAX-30 was 92 points higher, at 7,605.

On Wall Street, it was another volatile day for US stocks as the Dow Jones slumped by 190 points in intra-day trading, only to recover most of its gains in the last hour of trading. The Dow was up 153 points to 13,657 at the close, with General Motors leading the risers. The S&P 500 was 20 points higher, at 1,497. And the tech-heavy Nasdaq was 51 points higher, at 2,612, as the sector was boosted by upbeat earnings for network management stock, Cisco.

In Asia, the Nikkei was up 141 points to 17,170 and the Hang Seng was down 97 points to 22,439.

Crude oil was little-changed at $72.09 this morning, and Brent spot was down to $70.36 in London.

Spot gold was at $674.00, having hit its highest level in nearly two weeks - $767.60 - in New York yesterday. And silver was down slightly at $13.09.

In the currency markets, sterling had risen to 2.0361 against the dollar and was at 1.4780 against the euro. And the dollar had fallen to 0.7257 against the euro and 119.04 against the Japanese yen.

And in London this morning, Europe's largest defence stock, BAE Systems, announced a 27% rise in first-half profit, exceeding analysts' estimates. Net income was £515m compared to £405m over the same period last year. Shares in BAE had risen by as much as 4.2% today.

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