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Last Updated: Monday, 8 September, 2003, 16:14 GMT 17:14 UK
Q&A: Is the house price boom over?
Recent house price surveys have suggested that the widely anticipated slowdown in Britain's house price boom is underway. BBC News Online examines the factors behind the slowdown and whether there are sharper falls to come.

Why is the housing market cooling?

The annual rate of increase in house prices has been falling back for a number of months, according to many of the main property surveys.

And the Bank of England warned in February that it expected growth to slow to zero in the next two years.

In some areas, notably London and the South East of England, prices have been static and have even fallen.

Many surveys have identified the lack of first-time buyers as the reason for the slowdown in prices.

House prices have reached such a level that it is becoming increasingly difficult for first-time buyers to get onto the property ladder.

Mortgage lenders are also becoming more careful about lending levels and the size of mortgages they will grant, therefore limiting the price potential house-buyers can pay.

But aren't interest rates are still very low?

Interest rates are at 3.5%, their lowest level since 1955 - which is one of the factors commentators previously attributed to the boom.

But in some areas, house prices have reached such a level that properties have become unaffordable, despite the low cost of borrowing.

Demand for housing has also cooled slightly as growth in the UK economy has started to slow, and confidence was hit earlier this year in the run-up to the war in Iraq.

A number of analysts and market commentators have also been warning against the exaggerated debt levels the low interest rates have created.

In March, the International Monetary Fund (IMF) warned that runaway house price rises could threaten the UK's hopes for an economic recovery.

Why are there such wide regional variations?

Almost all surveys agree that the slowdown has been more pronounced in London and the South East of England - where house prices are higher.

First-time buyers have a particularly tough task trying to afford a property here, and the region has also seen big job casualties among wealthy City workers.

But in many other parts of the country, notably Wales and the North, where prices are cheaper, the property market has continued to surge ahead.

However, the Halifax has said it expects the rate of growth to even out across the country in 2004.

Is the property market going to crash altogether?

Most commentators think not.

They suggest prices can go on rising in some areas, though at much more modest levels than before.

But after slowing quite sharply in the spring, the housing market has been showing new signs of resilience in recent months.

In its August survey, the Halifax said house price growth "remains strong" and is predicting that prices will increase by 10% in 2003.

Meanwhile the Nationwide building society raised its prediction for price growth in 2003 from 10% to 13%.

However, most experts think the gradual slowdown in price rises will continue, and there will be no immediate return to price increases of above 20%.

How risky is the buy-to-let market?

The buy-to-let market has mushroomed as people have turned to property speculation in the hope of getting a better return on their money than they could on the stock market.

There is evidence in central London, for example, that these buy-to-let speculators could face problems as rents have been falling.

In some parts there are basically too many landlords chasing too few tenants, which is pushing down rents.

There is no doubt that it is a high risk sector which could hurt many buyers.

But even the 70,000 buy-to-let mortgages agreed in 2002 made up only 5% of the total.

This means that even if some people do end up getting their fingers burned in this sector, they are unlikely to destabilise the whole market.

How can I protect myself?

With prices rising so dramatically, investors need to be cautious - and remember a few important principles of property investment.

  • Property is an investment, which can go up and down in value.
  • It should be viewed as a long-term investment and is illiquid. Unlocking the value of your house is not the same as drawing money out of a cash machine.
  • Investors should be cautious about overstretching themselves. There is now a real danger that younger people, who have overstretched themselves financially, could face huge problems in the future.
  • Responsible mortgage brokers are now warning people who are concerned about higher interest rates to opt for a fixed mortgage rate, so that they do not get caught out.
People might be tempted to take out an interest-only mortgage, because the monthly payments are lower than a repayment deal.

But an interest-only mortgage covers only interest payments and not the underlying debt.

People can also use an investment product, such as an equity-based investment in an Individual Savings Account (ISA), to pay off the debt at the end of the mortgage period - typically after 25 years.

But recent experience with underperforming endowment polices has shown that investment products do not always make enough money to pay off the underlying debt.

Repayment mortgages may be a little bit more expensive, but they should cause less worry. They pay off both the interest and mortgage debt each month - and are not dependent on the vagaries of the stock market.

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