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House prices set to go up further

Another week, another prediction about rising house prices. But how high can they go?

Most people could write the story themselves. House prices are on the rise and look set to continue.

Headlines from Monday's papers alone included "house prices rise by �3,000 a week ", "house prices to rise by 50%", "increase in house prices is highest for five years" and "bullish homeowners ask for record-breaking prices". That's just a small selection, but how high can they go?

Not so long ago forecasts of a crash in the housing market began to gather speed. Doomsayers were forecasting as much as 40% could be slashed from the value of homes.

Parent trap

But the housing market has held up and latest figures from major indices put annual house price rises at anything up to 9%. Figures vary due to the different methods of collecting data.

"The key to sustaining housing price rises is affordability," says Russell Jervis, managing director of Haart Estate Agents. "At the moment we have what experts call 'flat earth', with inflation, interest rates and unemployment at historical low levels.

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"This means lenders are giving out more money than ever before and more buyers are able to borrow enough cheap money to keep the market buoyant."

Where once people could only borrow three times their income, now they can easily get six times what they earn, says Peter Brodnicki, managing director of the Mortgage Advice Bureau.

"But there is a point when house prices will stop going up. They will fall over the next 10 years, it is a cycle after all. But they look set to rise for some time yet.

"Doomsayers of a few years ago who predicted a crash have faded away. But you do have to be cautious because the market does rely on a whole set of circumstances continuing."

Debt levels

But with so many first-time buyers already priced out of the market and existing homeowners unable to trade up, how can house prices continue to rise? The key answer - parents. Some lenders have already started to offer parent/child mortgages.

"A key ingredient in house prices continuing to rise is parents passing down the equity in their own home to help their children get on the property ladder," says housing economist, John Wriglesworth.

Just because a crash hasn't happened yet, doesn't mean that it won't Reinhard Schu

But there are still some pessimists out there. Just because a crash hasn't happened yet doesn't mean that it won't, says Reinhard Schu, spokesman for Housepricecrash.co.uk.

"House prices can't go much higher. The fundamentals have not changed, we still have a massively over-valued house market funded by excessive liquidity. This will correct itself sooner or later, whether that will result in a major crash or a slowdown, we will have to see."

The website is also critical of the increase in parents having to use their equity to help out their children. It says this is a move driven by lenders to encourage people to take out even more debt to feed the liquidity of the market.

"It may carry the market for another few years, but it is not sustainable. What happens when all houses are mortgaged?" says Mr Schu.

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