House market enthusiasts tell you to forget the boom-bust of the late eighties. They argue things are different now as interest rates are lower.

But they are wrong and people buying now will end up counting the cost.

Andrew Oswald: Will the UK market follow Hong Kong market

The average house price today is five times as much as the annual average wage. Historically, that is too high and the market will correct soon.

I predict the market will grow in the first half of this year by about 5%. Then we will see stagnation followed by sharp falls.

In total, I believe prices will fall by 30% during 2004 and 2005. The correction will be painful and long drawn out.

The current housing market is a little like the stock market during the first quarter of 2000: price growth is driven by unrealistic sentiment.

It only takes enough people to question the sense in paying hundreds of thousands for a small property for the market to turn sour.

The same day as the [interest] rate cut the seller decided my offer was not good enough, I upped it a little but I was determined not to be bounced into paying over the odds Adrian Plant BBC News Online first time buyer

Follow Adrian's story

Back in 1990 when house prices fell, the level of house sales completed was very small - people lost confidence and just stopped buying.

If history has taught us anything it is that the new paradigms of a rising market really don't hold water.

And for those saying that low interest rates mean there can be no bust, I say look at Hong Kong.

In the former UK colony, property prices have fallen by two-thirds from their nineties peak but interest rates are only 1.5%, less than half the rate of the UK's current rate.

As for the recent Bank of England rate cut, this will make matters worse not better. It will further inflate the market making the pain harsher to bear when the inevitable price fall occurs.

From the early 1960s until recently, the UK had volatile and high inflation which resulted in volatile and high interest rates.

The key difference today is not only that we have low and stable inflation and low interest rates, but that this is expected to continue for the foreseeable future.

Ray Boulger: Will the British have the luck of the Irish?

The most important factor to most people when deciding if they can afford their dream property is "what are the monthly payments?"

On average, monthly mortgage payments are still very affordable and with interest rates stable or falling this situation will continue unless interest rates move up sharply and/or house prices continue rising much more quickly than earnings.

The current proportion of average earnings required to pay the average mortgage is well below previous highs and so, looked at in this context, house prices are not expensive.

Historically, when average house prices rose to around five times average earnings, this was a sign that houses were overvalued.

However, I believe this ratio is redundant in the low inflation/low interest rate economy we now enjoy.

Other factors are now much more relevant in assessing value.

The current proportion of average earnings required to pay the average mortgage is well below previous highs

The Irish experience provides a useful insight as to what is likely to happen in the UK.

Ireland's house price to earnings ratio fluctuated between similar levels to the UK until 1998.

In the last four months of 1998, Irish interest rates halved from 6% to 3% prior to the euro launch on 1 January 1999.

House prices continued to rise strongly and by 2000 the house price to earnings ratio had increased to six, sparking similar bearish comments on house prices to those now emanating from some commentators in the UK.

However, house prices kept increasing and the ratio is now nearly 8, as the impact of their even lower interest rates has continued to improve affordability and hence property prices.

Your Comments

It's always the people involved with the property market who seem to have a bullish view, but they have the most to gain.
A Elmas, Japan/England

I understand what Ray is saying, but he is wrong, Andrew is right, there is no such thing as "new" in economy, I believe that when this bubble bursts, it is going to be extremely nasty. Why do I think it will burst? apart from the answer "its the economy, stupid", basically even though monthly repayments are and will remain low, how can a first time buyer afford the deposit for such high prices? and with first time buyers out of the market, it will have nowhere to go, the Buy-to-lets will dump onto the market, and the spiral downwards will have begun! As it is starting to in London (just read the comments made at the back of the next RICS survey.....very interesting reading!)
Christopher cook, Surrey, UK

I don't agree with Ray Boulger. How can house be so affordable when you have to borrow 5 or 6 times your salary? These pundits should remember two thirds of the working population are on less than average earnings! Also what about single people? If I borrowed the maximum on my salary, I would be paying about 45% of my gross earnings in repayments. It seems the country will be divided between property "haves" and property "have nots" if this market continues to rise.
Richard, Lancashire, UK

A poll conducted by me amongst my friends suggests that those who currently own a house believe prices will stabilise and those who are hoping shortly to buy their first house believe prices will plummet.
Tom Disraeli, UK

Ray Boulger is correct. It all comes down to affordability, low inflation, low interest rates and unemployment, it would take a sharp rise in one or more of these to damper the current boom and who could argue that any of the above are waiting round the corner.
Chris James, South Africa

One factor that rarely is mentioned in the likely influence of inherited property wealth coming to this generation. Given the UK's ageing population and high property ownership levels this could be having a subtle yet strong influence on peoples buying habits.
Mark, England

I actually agree with both men (is this possible?). Ray Boulger makes the point about low interest rates and affordability. In the near term, while buying houses in affordable and lenders are offering long fixed rate mortgages, then people will be drawn into buying. This will continue to sustain the housing boom until either people get complacent with the low interest rates, or something happens to the economy (historically this goes in cycles). If the interest rate starts to go up again, then people will be stuck, as the borrowing to income ratio is far too high. So, as I see it, while interest rates continue to fall, people will have a false sense of security and continue to pay high prices for the next year or so. If interest rates then go up, this will provide enough of a shock to the market which will see prices tumble. The question is will the interest rate go up and if so, when?
Stefan Gibney, UK and Switzerland

There will not be a crash in prices as we have moved into a new era of low interest rates and low inflation. More and more people are stating to realise this and as such they are realising that they can afford to borrow more than they thought. This in turn is helping maintain prices. Yes, there will probably be a slowing in growth this year and we may even see a few years of relatively flat growth (3-5%). However the key to the market is that interest payments remain manageable - this is the factor that the above economist does not recognise.
A.Lee, Sheffield, England

I share Andrew Oswald's view that the current housing boom is unsustainable. One of the clear signs of an impending crash is unbridled optimism and opinions from experts justifying how and why the growth will be sustained. One does not need to look beyond the internet bubble to see the ominous parallels.
Suresh, England

From the first time buyers perspective, there is a cost to NOT buying. Given that rent payments are essentially money down the drain, someone paying �600 per month rent can actually afford to buy and have their property value decline by up to �7k per year and STILL be better off. So, for a first time buyer taking on a �100k property instead of paying �600pm rent, even the gloomy scenarios of 10%-20% declines over the next couple of years are actually not disastrous... and of course things could improve and if first timers don't act now they might find it even harder later.
Rick, UK

Anybody can say that House prices will fall back and this stands to reason, but no one can actually say for certain when this will be. Many Economists and Experts have been predicting a Crash for the last year but this has not happened yet, Instead I understand that House prices have come down in London but risen in the rest of the Country. I would say that we are more likely to see a slowdown and that prices could remain static for some time though I would not like to speculate on when or how long this is likely to be !!
Steve, England

I tend to agree with the professor. Each month the Halifax and Nationwide attempt to sustain an unsustainable market by producing misleading or selective statistics, simply because they are in denial, desperate to avoid the consequences of a meltdown. That meltdown will occur, the only questions are when, and how severe it will be. Enough respected commentators (including the Bank of England) continue to prepare us for the inevitable. Houses are only a commodity, and like the stock market subject to sentiment (where are the siren voices of 1999 tempting us with ever rising share values now?). The "quick profit" mentality fuelled by popular TV programmes is already coming unstuck in the buy-to-let and speculative sectors, and the �1m plus London market is in steady decline. Only a fool (or someone with vested interests) continues chant the mantra "rising prices forever"
Denise Mitchell, UK

House prices will stay high simply because there is no other reasonably reliable investment. People no longer trust the stock market, and are no longer paying as much in personal contributions into pension plans - what's the point? Partly as a result of this new short-termism, the banks must be awash with cash, so why on earth should interest rates rise? There is no CGT on one's main property, whereas a pension is still taxed, eventually. It all looks good for property as the only real short and long term investment. In my opinion.
Gil Marais-Gilchrist, England

Both Professor Andrew Oswald and Ray Boulger offer plausible scenarios for the movement of future house prices. For the individual buying a property in the current market, and I am one, the middle ground seems a sensible situation to hope for and expect. I believe buying a house now will not give a return like those seen in recent years but equally buyers will not suffer huge losses like those of the early nineties.
Paul, UK and USA

As in any market scenario, there has to be a "catalyst" for change. The 1989 housing market rise then crash was due to tax changes and subsequent rises in interest rates. The catalyst for the 2000 stock market crash was an increase in interest rates. There will have to be some factor which shakes people painfully out of the way they are thinking. This would more than likely be an interest rake hike or a sharp increase in unemployment. Until the "catalyst" factor kicks in, prices will continue to rise.
Colin Larcombe, France

I believe that neither of the above comments tell the whole story. Traditionally interest rates have been the key measure in the housing market, however the current upwards trend is I believe down to two things, firstly insecurity in the stock market leading to a shift to investing in property as opposed to shares, and secondly the changing mix of society - there are more single person buyers than in the past. Both of these factors lead to an increase in demand. This is compounded by the supply of new properties being below the demand. That is the key indicator, demand. Simple economics teaches us that when demand exceeds supply the price will rise. I believe it is for this reason that the government recently announced initiatives to build large numbers of new houses, to stabilise the market.
Andrew Thomas, UK

For the last year or so I've seen the prices of even the smallest starter homes creep out of my price range. As I haven't got a property to sell I've felt the rise more harshly than those with a property that has risen in value as much as the home they're buying. So, if you're a home owner already, the rise in house prices is not a big deal but it's the first-time buyers, those who are being priced out of the market, who are going to force house prices down. We simply can't buy houses and we won't buy houses in fear of a crash that will ruin us financially for life.
Paul Nattress, UK

It doesn't matter what the experts say, it boils down to what people are willing to pay. When it comes to houses and people sense does not always prevail.
Kenny,

Your experts rightly highlight affordability and sentiment as two key indicators in the housing market. It seems to me that sentiment is the key criterion. People will push the boat out if they feel bullish about the future. Combine a war in Iraq with rising unemployment, and I think you will see a massive drop in sentiment. 30% may be a little steep for a crash in 2003 - 2004, but I would certainly think 10% - 20% is on the cards. The ONLY people talking up the housing market today are those involved in it - mortgage brokers, agents etc. I suspect everyone else is terrified.
Toby Aldrich, UK

People will continue to buy homes whilst the interest rates are low and affordable. House prices will not drop until interest rates rise considerably and the cost of the monthly payments is beyond them.
Si Smith, UK

I believe that the market will peak and then slowly and steadily decline. The threat of war combined with manufacturing job losses will have a huge impact. Unemployment will rise in a number of industries and people will start spending more cautiously. I think that as with the dot.com shares house prices are currently hugely over inflated and will inevitably have to drop as the people stop upgrading their accommodation.
Nadina, UK

Both of your experts say things I understand but I find myself cherry picking from both scenarios to create the one which would suit me the best. I have just sold my house in Devon for 175% of what I paid for it two years ago. I don't think that it will rise in value that quickly in the next two years but you never know...
Ian Simmins, UK

I do not feel that the market will crash as people will always need somewhere to live, however I am hoping that it does crash as a single person, trying to buy a house is impossible at the moment. I earn a reasonable wage but mortgages are based on 2 wages. I keep looking into this affordable housing that is being built but in Hampshire a 1 bedroom affordable flat is �130k and I certainly can not get that mortgage on my own.
Caroline Hill, Hamphire,UK

What goes up, must come down and history does have a habit of repeating itself albeit never quite in the same way. Ray has certainly got one thing right, people do look at prices on the basis of what they can afford to pay each month rather than on the overall cost which, is fine if you are financing a new car over 3 years but foolish on a 25 year loan. There are some interesting new factors to consider when prices start to soften this time round and the consequences are hard to guess. In the last slump people were caught with negative equity, their loan being greater than the price they could sell for with the result that they either could not move or, if they did, had to carry with them an additional debt. So the same thing will happen again except, this time, there won't be the benefit of inflation to reduce the real value of that debt over a short period. The problem with low inflation is that the real value of any debt, is not eroded over time. It is also probably true that existing home owners, rather than moving house, have taken equity out of their property via a remortgage, to spend on other things. This type of deal has probably kept the High Streets busy but, where that money has gone into buying a second property to rent out, there could be a lot of pain for the people concerned. The rental market has already softened with landlords having to take "offers" on the rent which is no problem for those who bought such properties 10 years or so, ago. For new landlords who have bought at inflated prices, the picture is not so good. Once prices start to fall, these people will feel the pain first which will probably lead to these properties coming onto the market to be sold, further depressing prices.
John, London, UK

I think Professor Oswald is on the right path. With so many first time buyers like myself being completely priced out of the housing market, House prices surely can't keep rising. It is time people stopped using the average wage as a measure and instead used the wage of the average person. Nobody I know is on anywhere near the average wage (The figure is inaccurately high due to the ridiculous wage gap between high pay and average pay). As a result house prices in my area are actually around 8.5 times the average persons wage.
Lee , Birmingham, UK

The Hong Kong example and the Ireland example both cover times of extreme change for each respective country. Hong Kong was going through the transition to Chinese rule while Ireland was being pumped full of EU money creating a "tiger" economy. England is in a "normal" economic pattern where house prices long term are governed by multiples of earnings. Cost of borrowing will cause short / medium term highs and lows within this long term inflation based growth. Yes, the multiple may remain high, and may even go higher, but eventually the long term trend will prevail and force the multiple lower again.
Aaron Cowie, England

I dont think that you can compare the housing market to the stock market as Andrew has done. We must remember that people actually want to buy houses to Live In Them, not just to make money. I know many people in their twenties who would like to buy for the first time. Does this count for nothing? Although i am following Tom Disrealis rule as i have just bought an inflated-price-house with my partner.
Sarah Philp, Birmingham, UK

I agree with the Professor, prices are on the way down. Properties in Richmond are becoming cheaper by the hour. Wake up the rest of the country because the ripple effect is happening big time in the traditionally expensive areas of London.
Lisa, Richmond, Surrey

The cheap credit available to property buyers is not only because of low BoE rates, but also because banks and mortgage lenders regard this type of lending to be relatively risk free. When more people start defaulting on their payments and losing their jobs, then the true risk of these loans will be revealed. This will force lending rates/criteria up, even if BoE rates continue to fall. There is not only a bubble in house prices, but also one in bank lending to homeowners.
Chris Lucas, UK

Why does it matter, surely the prime requisite for some one bying a house should be as a roof over their head, not as an investment, this should be considered of secondary import. If you buy as an investment, then like any investment, it is a gamble so don't bleat if you lose!. As for the comment "Ruined finacially for life", don't be so melodramtic, as long as you can keep up the mortgage payments you have a home, you may only loose money if you want to sell it, much like any other commodity.
Chris, UK

Its not just the bottom rungs of the property ladder that are moving out of reach, all of the higher rungs are getting further apart. As a home owner I would welcome some collapse in house prices because although our own house would be worth less, the amount of extra debt we would need to take on would be reduced. Getting the same house for less money seems like a good idea to me. The only certain winners in this market are the banks.
Guy Roberts, UK

At current interest rates, it's just much cheaper for me to buy than to rent - even if I bought now, my mortgage would be only about 80% of the cost of renting a similar property - with the advantage of course that I'm investing in something I get to keep at the end of the day. Whilst this would change rapidly if interest rates changed, I think a) they'd have to change quite a long way for it to tip that balance, and b) most buyers don't think that long term. so i reckon prices will continue to rise for a while yet...
richard, UK

No-one ever really mentions that Britain is one of the few places where most people own their property. On the continent renting is the norm for younger people. Although it is likely to worsen the rich-poor divide the huge amount of people with buy to let property may lead to a subtle shift away from owner occupation towards renting.
Stuart, UK

Its important to see the big picture and look at the economy as a whole. My particular point is employment. Although the Office of National Statistics claims unemployment is on the decrease, observations tell otherwise. Crucially, secure full-time jobs are decreasing, as are wages for the masses. Whilst a mean average wage may increase, there's a strong bi-polar distribution. The result is that fewer and fewer people have enough money to afford the exorbiant house prices, and hence demand falls, and prices plummet. I wouldn't be at all surprised if Andrew Oswald's prediction of a 30% fall is optimistic - a 50% decrease being more likley over the next 2-3 years.
Jake Gordon, England

What this all really boils down to is public opinions. As long as there is a continued increase in demand for housing, the laws of economics state that the prices will continue to rise. All it would take to initiate a crash is for the balance of opinion to change and people to stop fuelling the demand. People with a vested interest in keeping the market bouyant are propping it up with claims of sustained growth. I would like to bet that Rick, UK above, either works in the property trade or has just bought a house.
Dan, UK

Property prices can only keep going up as occupancy rates drop. With each new divorce, two homes are needed instead of one. Supply and demand dictate that as demand rises and supply does not, prices will rise.
Tim Johnston, Southeast, England

So we are told that "house prices rise as interest rates fall" is an immutable economic law that we can all rely on? So the three bed semi costing �250,000 at 4% will increase to �500,000 at 2% and �1 million at 1% and .... an infinite amount at 0% because the interest repayments are zero? There surely comes a point when the absolute value for money in the property market is so poor in comparison with non property assets and the years of work and saving required to repay the capital, that the market is just not sustainable. When that moment dawns on people, you really don't want to be the person who just paid for someone else's luxurious retirement to France (or anywhere with sensibly priced property) by buying their over priced house with a debt lasting 25 years. If that semi reaches �1,000,000 - bonjour Provence, au revoir south east England !!
Nigel Curtress, Surrey

To all first time buyers, don't do it, we fuel the market. Stop buying at ridiculous prices and realise when you are being ripped off. Sit back and wait for the fall and then select your bargain.
Jan, UK

Another important consideration in house buying was - buy as high as you can afford, as your pay goes up your mortgage becomes more affordable. Hands up if you've had a pay rise in the last couple of years. No? I didn't think so. PS National insurance contributions go up in April so you'll have even less take-home pay.
Darryl, UK

It is obvious to me that house prices cannot rise at a rate of 25% indefinatly. When the average pay rise is arround 4%, it stands to reason that their has to be a slowdown at the very least.
Paul, England

I agree with the professor, and believe that apart from the inevitable movement upwards in interest rates at some point, affordability will also be severely hit by the forthcoming increase in National Insurance contributions, increase upon increase in Council taxes (both immediately and following the proposed re-banding of properties), future tax increases necessary to meet the Government's spending plans and budget deficit, and consumers having to eventually pay their record level credit card bills.
Kevin Welch, England

I agree with Lisa's comments from Richmond. London prices are falling, people are losing confidence in the market. Estate agents are not telling purchasers that the prices have been reduced. However, they are often lapse in updating their websites and the discounts being offered are only too visbile. The rest of the country will experience this in time and we will see a repeat of the last housing market crash. During the last crash people kicked themselves for not seeing it coming. The warning signs are there, proceed with caution.
Rob, London

It might be a an idea to look at the morals of the lenders and estate agents.After the fiasco of the early nineties of people losing all they had and some that are still paying for it.They (the lenders and estate agents)are the ones that are again driving the market instead of letting it cool down.Rules should be put in place to tighten the reigns of house buyers and to explain the financial consequences of a bad fall in the housing market.A home is for living in and to hopefully bring up a family.How do we expect the younger generation to have children with such a large noose round their necks. Nobody knows the future including the two guys in this debate but we could all pull together for a solution to this question.
David, England

As someone currently looking for a first house, I would love the market to drop substantially. But there are many people in my position. If prices start to drop, some of those people will then be able to afford what they couldn't afford before. They'll start buying and that will push prices back up. Unless of course some other factor (mass unemployment, high interest rates) means that they still can't afford the lower prices. Perhaps if all first time buyers could unite & agree not to buy anything for the next 6 months, there would be a nice sharp drop!! But I suspect that won't happen.
Emma, UK

House prices have been stagnant in the part of Hampshire where I live for the last five months and I'm beginning to see reduced signs in Estate Agent's windows. One shop keeper I was talking to, has been trying to sell his house for the last four months with no takers. I don't think house prices will crash where I live but I don't think they willl rise any more either, regardless of whether interest rates fall further or not
Ranj, UK

Recession is inevitable as the finance industry doesn't accept a good year as being such. People only have so much money, and when it's gone and the credit card's full and interest builds up, repayments can only come from monthly essentials like mortgages. That's the cycle of life - you have to ride the peaks, but the troughs are always there!
Nick, UK

Most people agree with Andrew but the reality agrees with Ray. How long must people wait for the crash? Could this problem be averted by moving jobs to other parts of Britain? It will increase demand in those areas but the overall demand will even out. Alternatively, build more flats (aiming at the increasing single population). Remember the cartoon character who runs off the cliff and doesn't realise it, their legs thrashing around for a few seconds before falling to earth. That is todays situation but the seconds could be years.
Jason, England

I cannot possibly see how the housing market can continue to increase. I have been looking for a property as a first time buyer for sometime now and can see no light at the end of this miserable tunnel. So what if the interest rates have been cut. It still does not help me to get a mortgage. As a single person and on a wage which is above the national average I still would not be able to get a suitable mortgage to afford to buy a property where I live. Not only that the repayments per month alone would be more than renting a property. Therefore what hope have first time buyers got. Surely without us to fuel the housing market how can there not be a decline in house prices?
Olivia, England

Who do you think has called the market correctly? Are we heading for a crash or is growth going to continue? Please send us your comments.

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