Property investors will have taken notice of the fact that UK house prices have started to fall. Recent data have confirmed earlier anecdotal evidence about a turn in the property market; liquidity (turnover) is starting to dry up and buy-to-let landlords have shown signs of selling up.

The UK is not the first major economy to see the property cycle rolling over: Australia holds that distinction and provides some important clues about what is likely to happen next to many other housing markets.

All investors need to keep an eye on property, not just those with money in bricks and mortar. On many occasions in the past we have seen property price collapses cause problems for the whole economy. Even if a property downturn's effects can be relatively contained, there are still consequences for many different types of companies from housebuilders through to mortgage banks.

Some commentators have been forecasting a collapse in global property prices for years. The charge has been led by the Economist newspaper, with gloomy forecasts of a potential world recession on the back of the property "bubble" finally bursting.

Less apocalyptic analysts agree that the housing market in many countries has run ahead of itself, but, they argue, there is no reason to panic: prices might stagnate or even gently decline, but that will be easily absorbed by the wider economy.

Australia provides the most recent example of an economy that, so far at least, has weathered a falling property market with ease and a stock market that has powered to new highs long after the real estate cycle turned.

Global evidence on the extent to which national property prices have run beyond "fundamentals" has recently been provided by the IMF. In a thoughtful and sensible modelling exercise, 18 countries were studied and the effects of factors such as interest rates, credit availability, demographics and real incomes were calculated.

The IMF found that in Australia, Ireland, Spain and the UK, house prices, at the end of 2003, exceeded the level justified by fundamental factors by 10 per cent to 20 per cent.

The first point to note is that a 20 per cent upper bound for over-pricing is not consistent with "bubble" style valuations. Hysterical commentators take note. But any run-up in prices since the end of last year, as in Ireland for example, will have increased the level of over-valuation.

The second is that the IMF's results confirm most people's basic intuition: low short-term interest rates explain much of the rise in house prices. Indeed, the reason why the Australian and UK markets were the first to start falling has been a function of an early turn in the interest rate cycle. Interest rates have a more powerful impact on property prices than ever before.

House prices are an important coincident indicator of economic activity, particularly in Ireland and the UK. So, whether house prices affect the economy, or vice versa (or both), the facts that UK prices are now falling, and Irish prices are not, tell us something important about the relative cyclical position of those two economies.

But the IMF study also reveals that the forces driving individual housing markets are becoming more globalised: if the falling UK and Australian markets are joined by others it is a fair bet Irish property prices will turn.

While the IMF found the role of purely domestic factors on Irish prices to completely dominate international drivers, this was during the boom years: now that the Republic is a fully paid-up member of the rich country club, our property market will probably be more susceptible to global influences.

At the very least, we can expect powerful effects on domestic property prices when the ECB finally decides to tighten the monetary screws.

The IMF gives us some marvellous data to allow calculations of relative value across different property markets. Just as equities can be valued by looking at some key ratios such as price to earnings, house price to (personal) earnings ratios provide important information.

Since 1985, the Irish housing P/E ratio has more than doubled. This is actually less than the increase in the Netherlands or Spain (by 2 ½ and 2 ¾ times respectively) but more than the rise in the UK, US or Australia.

Another important valuation ratio is price to rents (PR). Since 1970, this ratio has risen by nearly five times in Ireland and, at the end of last year stood at a higher level than any other major industrialised country - 40 per cent higher, for example, than in the UK.

If Irish property prices do stop going up - let alone fall - there is precious little comfort to be had in terms of rental yields.

I may be missing something here, but it seems to me that any prospective first-time buyer of Irish property would be well advised - I'm tempted to put that in even stronger terms - to rent rather than buy at the present time.

Property markets rarely spontaneously combust. There is almost always a list of usual suspects, headed by interest rates. The Irish property boom would have been strangled long ago if interest rates were still set in Dame St. And because there is little to fear from the ECB, for the time being at least, it would be wrong to get too apocalyptic.

But Irish property prices are definitely out of line with fundamentals and, one way or another, sooner or later, they will come back into line.

A global property collapse looks unlikely but the party is drawing to an end. Anyone still wishing to put money into houses might be surprised to find that the cheapest property - in terms of lowest PE and PR ratios - is to be found in Germany and Japan. The Irish price-rent ratio is around four (yes, four) times the level in both Germany and Japan.

If these were bond or equity market comparisons we would be arguing for one of the most obvious "spread" trades since hedge funds were invented. Anybody know of a way to "short" Irish house prices and "long" those in Germany?