Ratings agency Standard & Poor’s says French homes are the most overvalued, followed by the UK and Spain

European house prices could suffer a double dip within the next year according to a report by rating agency Standard & Poor’s.

The report noted that overall prices had stabilised across Europe and risen in the UK, but warned that with the exception of the bombed out Irish market nominal house prices continue to exceed 2005 levels.

The report said: “To us, this suggests that we may not yet have witnessed a full correction of some of the imbalances that the 1999-2007 housing bubble created. If so, we think prices could take a second dip later this year or in early 2011.”

S&P said based on long term measures of value such as the ratio of house prices to rental incomes and to incomes, house prices in most European countries remain overvalued.

S&P added that a catalyst for price falls in the coming year could be a spike in the yields on eurozone government bonds, against which mortgage loans are priced.

The report said French house prices were the most overvalued, followed by the UK and Spain.

French prices have fallen by just 8% from their peak in the first quarter of 2008.

Despite large falls in Spain the report said the market was still overvalued and said further drops of up to 12% were likely before prices finally bottomed out.

But it said the dramatic plunge in Ireland’s housing market was “overdone” leaving the market undervalued by about 12%.

However, any recovery in the Irish market looks some way off as the cost of new mortgages in Ireland has risen dramatically since the credit crunch and as such mortgage lending remains “very weak” the report said.

The report said UK house prices were likely to continue to rise slowly, supported by the lack of available housing, but, against the backdrop of the still fledgling economic recovery, report author Jean-Michel Six added: “Countries that are seeing a rebound in housing prices are by no means out of the woods yet.”

The report said that unlike Ireland and Spain, the rise in UK house prices prior to 2007 wasn’t associated with a house building boom and added that the UK still suffers from “a chronic shortage of dwellings”.