Buy with caution - and defy the doomsayers

Booming property prices in the past few years have led many commentators to predict, at one time or another, that a crash is imminent. This state of affairs, they have argued, can't be sustainable. But despite the doomsayers, prices have continued to climb upwards, often at an astonishing pace.

Booming property prices in the past few years have led many commentators to predict, at one time or another, that a crash is imminent. This state of affairs, they have argued, can't be sustainable. But despite the doomsayers, prices have continued to climb upwards, often at an astonishing pace.

Yet when the person apparently predicting a crash is the Governor of the Bank of England, which is responsible for setting interest rates, it is hard not to sit up and take notice. And when Mervyn King last week warned of the risk of falling property prices and hinted at more interest rate increases, shockwaves spread through the housebuilding industry, mortgage lenders, homeowners and first-time buyers.

Those who are in the process of purchasing a property, or thinking about doing so, could be forgiven for panicking. Are you about to cast yourself into negative equity (when the market value of the property is lower than the mortgage)? Will we see a return to the dark days of the early 1990s when the housing market crashed and took several years to recover?

The important thing is to stay calm. Although Mr King's comments have been widely interpreted as signalling that a crash in the property market is all but inevitable, along with further interest rate rises to curb house price inflation, the evidence suggests the picture may not be quite that bleak.

"Admittedly, it's unusual for any market that has enjoyed the rampant growth we've seen in house prices to experience a managed correction rather than a crash," says Mike Felton, manager of the Isis UK Prime fund, which invests in some housebuilding stocks, among others. "But unless interest rates rise to a level far higher than current expectations and unemployment also rises sharply - neither of which we believe is remotely likely - then there is little fundamental reason why house prices should crash."

The latest report from the Royal Institution of Chartered Surveyors (Rics), published the same day as Mr King made his comments, backs this up. The survey, which covers the three months March to May 2004, reveals clear signs that a slowdown in the housing market is already occurring, reducing the risk of a sudden crash.

While house prices have continued to rise, the pace has, according to Rics, slightly slowed for the first time in six months. Completed property sales fell to 30 per estate agent, on average nationwide, for the quarter to May, down 5 per cent since February.

Rics' housing spokesman, Ian Perry, says: "Heated speculation over interest rates has cooled buyer activity and [the recent base] rate rise confirms the upward trend is likely to dampen any further price surges."

As a result, Rics believes the heat is already being taken out of the housing market. "We think that the likelihood of a crash is very small indeed," adds Mr Perry.

Mortgage lenders tend to be of the same opinion as they try to convince buyers there is no need to put off their property purchase.

However, most add a word of caution. Stuart Bernau, executive director at Nationwide building society, warns buyers against pulling out all the stops to get the biggest possible mortgage: "Affordability is becoming more of an issue, but borrowers should not be tempted to overstretch themselves."

If you are thinking about buying, you may be tempted to hold off until the future of the housing market is more certain. But this may not be possible if you have to move now, for whatever reason.

Bear a few dos and don'ts in mind and you can reduce the risks involved in purchasing a property in the present climate:

* Don't buy a home now if you are planning to sell up in the near future. You don't want to be selling in a market where prices may have fallen or other people are holding off from purchasing.

* Do buy for the long term. If you pick up a house or flat where you can envisage yourself living happily for several years, you've got more chance of it appreciating in value by the time you come to sell.

* Don't overstretch yourself on the mortgage. Make a note of your monthly outgoings and work out what you can realistically afford to pay off on the home loan each month.

* Do fix your interest rate. Fixed-rate deals bring peace of mind - exactly what you need in these uncertain times.