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Last Updated: Tuesday, 13 March 2007, 23:57 GMT
Head to head: Will property prices crash?

House prices are accelerating again and first time buyers are stretching themselves even more.

But interest rates have gone up and may go higher.

Two commentators ponder if the property market is a bubble about to burst.

JONATHAN SAID, Centre for Economics & Business Research

Jonathan Said
Jonathan Said argues that demand for houses will outstrip supply

With the average price of a house at 200,000 and residential property making up 53% of household net wealth, whether the housing market is going to crash or otherwise makes regular pub conversation.

It is quite easy, at first, to worry that the market could crash in the next few years.

Recent interest rate rises, a consistent rise in the ratio of house prices to incomes and the end of the buy-to-let "boom" are all cited as reasons to fear the worst (the worst, that is, if you are a homeowner).

However, this ignores the fundamental problem with the housing market in the UK which will prevent a housing market bust: the demand for houses by far exceeds the supply of houses.

This mismatch is caused by a number of factors.

Not enough properties

The UK does not have a large enough stock of houses in their areas where most people want to live. In 2005, 193,000 new houses were built.

This may be the highest in 15 years but it is still only three-quarters of the number that the government's own independent report estimated would be required, in each and every year, to bring house price inflation down to about 1%.

To induce a crash would require far higher levels of construction.

Government planning restrictions and schemes such as key worker housing prevent the construction sector from fully responding to the market's price signal.

More households

Population growth - boosted because more of the world's people want to live in the UK - and an ever smaller household size means that there are more people who need to live in houses than ever before and, also, that more houses are needed per person.

Additionally, when thinking about buying a house, potential house buyers do not compare their income to the price of a house.

Rather, they compare their income to their annual mortgage payments.

With interest rates at about 5% in recent years, mortgages remain affordable when compared with the early 1990s.

Rich investors

The new large and rich countries of the world - oil producing countries and the Asian dragons - remain happy to park their new-found wealth in the world's main financial centres and their property markets.

Looking forward, as long as supply continues to fail to react to the burgeoning demand for housing, it is very unlikely that house prices will crash.

As long as these fundamentals remain unchanged, a housing bust is very much off the cards.

Jonathan Said is a senior economist at the CEBR.

JONATHAN DAVIS, Housepricecrash.co.uk

Jonathan Davis
Jonathan Davis says buy-to-let investors will take fright

The main factor will be how those who have entered the buy-to-let market (speculators) react.

During the past eight years the number of buy-to-let mortgages has risen from about 30,000 to about 900,000.

Over this period, this sector of the market has soaked up a significant proportion of properties which would have, traditionally, gone to first-time buyers.

It is well documented how difficult things are for those who want to buy for the first time.

In my view they should in fact wait for lower prices and they will find themselves in a far better position in due course.

Looming headache

First-time buyers will also save themselves from a huge long-term financial headache.

It has reached a stage where "buy-to-letters" are no longer buying with sound investment principles in mind but purely with hope for capital appreciation.

Few sensible investors would invest in any asset producing such low returns on capital with such high levels of capital risk.

The time approaches swiftly when capital growth will falter and then reverse.

As inflation has risen - and the Bank of England believes it will be at or above the consumer price index target in two years' time - so have interest rates.

There have been three UK interest rate rises, of a quarter of a percentage point each time, since August last year.

This makes the monthly mortgage payments for those with buy-to-let properties very high in relation to net rents received (after the cost of repairs, properties staying empty and agents' fees etc).

Long decline

My view is that some people with buy-to-let properties will take fright and sell while they believe the going is still good and they can get out before the stampede.

Right now, there is a stampede in the US: according to some experts, the market is falling faster than since the Great Depression of the 1930s.

The buy-to-letters drove it up and they are bringing it back down again.

This is likely to happen in the UK.

Supply will soon exceed demand. Indeed, there are signs it does already.

It took some 12 years to get us up to where we are now and, like an oil tanker reversing, it is likely to be several years on the way back down.

The last crash lasted five years, from 1989 to 1994 when prices fell about 15% in cash terms and about 35% when you add back in inflation.

Inflation will not mask the fall this time.

Jonathan Davis is a Chartered Financial Planner and is also a spokesman for www.HousePriceCrash.co.uk.

The opinions expressed are those of the authors and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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