Booming homes market heads for fall

THE HOUSING market is heading for a repeat of the boom-and-bust cycle of the Eighties that left tens of thousands of people trapped in negative equity, with homes worth less than their mortgages, estate agents said yesterday.

Homeowners are using their nest-eggs to invest in properties in the hope of cashing in on returns of up to 20 per cent a year from rents and property price rises. But estate agents fear the mini-boom will be short-lived and some buyers could find themselves trapped as prices fall.

London and the South-east are set to experience a sharprise in prices while homes in the North will fall in real terms as tiny price rises are outstripped by inflation, according to Deutsche Bank, which yesterday published a report warning of a North-South house price divide. The threat of price rises in one region of the country and low growth in the rest is also causing headaches for officials at the Bank of England who set the cost of borrowing.

The influx of cash into the property market has even reached council estates where, for example, flats bought under the right-to-buy scheme at pounds 20,000 are changing hands for pounds 140,000 in Gospel Oak, on the fringes of Hampstead, the exclusive north London suburb. One ex-council home, a Victorian house in north London, is on the market for pounds 300,000.

One estate agent, who declined to be named, said: "The simple reason is that, particularly in London, people are choosing to take their money out of savings accounts, because interest rates are so low, and sink it into property."

As more people buy to rent out, house prices will be forced up. At the same time, rents will slip downwards, cutting the yields to landlords. "People are buying high in a competitive market and at some point people will realise it can't go on. Some people will be buying straight into negative equity."

An economist with Deutsche Bank, Stephen Bell, said: "There is likely to be increased interest in buying to rent as an alternative to building society deposits. This would tend to depress rental yields by reducing rents and bidding up prices."

Martin Ellis, housing economist with the Halifax bank, said there could be a short-lived boom but overall there would be a steady recovery.

"In parts of London where prices are rising there is some speculative activity. People are sensing they may be able to make money.

"This may only be a temporary thing and people may find this was not a very satisfactory investment after all."

Deutsche Bank said prices in London and the South-east would rise by up to 10 per cent this year, compared with just 2 per cent in Scotland and the North-west.

The Bank of England, which has the job of ensuring inflation is kept under control, yesterday said it was aware of the situation. Mervyn King, the Deputy Governor, said: "We shall watch it very carefully because it might lead us to think there is a risk in the future."