House market 'not heading for crash'
Updated: 19:00 EST, 13 June 2002
ECONOMISTS sought to reassure homeowners that the housing market was not heading for a 1990s-style crash following warnings that current price growth was unsustainable. But one commentator warned that following double digit price increases during the past six years it was no longer a good time for first-time buyers to enter the market.
The comments come after Bank of England Governor Sir Edward George told a Commons Treasury Select Committee that the current rate of house price inflation was unsustainable.
David Clementi, the Bank's Deputy Governor responsible for financial stability, also said: 'The level of house price inflation is unsustainable and the longer it goes on then the sharper is likely to be the final adjustment.'
But economists said the market was not heading for a bust, insisting that an adjustment was more likely to come in the form of a stagnation in house price growth for several years.
Saxon Brettell, a director at Cambridge Econometrics, said: 'It's worrying and unsustainable, but we do not think there is enough in the current situation to suggest a sharp adjustment.' But he added: 'The longer this goes on, the greater the risk of a sharp adjustment.'
He said there was still plenty of confidence in the market, wage growth was fairly good and the economy was benign, though house prices were overvalued in the South East. He added that in the 1980s the boom was brought to a halt by a recession, mismanagement of the economy and a doubling in interest rates to around 14% which all took the strength out of the housing market. He said what was more likely to happen this time was that the housing market would stagnate for a long time, possibly even a decade.
But Brettell warned first-time buyers: 'This is not a market people should be entering without equity. They could do better by waiting, and renting property is now down in price.'
Martin Ellis, Halifax group economist, said: 'House price growth at current rates is unsustainable, but we do not think that implies that the market is over valued and we do not think there is about to be a crash.'
He added that first-time buyers who could afford to enter the market should not be put off by fears that there was about to be a fall in prices, leading to negative equity.
Alex Bannister, Nationwide economist, said he did not think the housing market was as overheated as it was during the 1980s, and homeowners should not be concerned as long as the economy remains relatively benign. But he warned that people should not enter the market hoping to make a 'quick buck', and should be aware that they could lose their deposit if prices fell slightly in localised pockets.
John Wriglesworth, of the Wriglesworth Consultancy, also agreed that the market was not heading for a crash. He said the reduction in interest rates from 6% to 4%, which had increased affordability, combined with low unemployment, high consumer demand and a shortage of supply had led to the current boom.
He expects the market to slowdown eventually, with prices rising by around 20% this year, and 8% next year, followed by a period of stagnation. But he warned that if the Government intervened by significantly putting up stamp duty or the Bank of England doubled interest rates the market could go into a 'tailspin'.
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