Probably the biggest single question taxing the minds of those whose business it is to predict the UK economy is whether the soaring housing market is a bubble about to burst.
With newspapers splashing massive house price increases and TV programmes telling viewers how to make a fortune out of property, some experts believe a public with £ signs in their eyes has fallen fatally in love with bricks and mortar.
This is a debate that pits big names against each other in a judgement call that will make and break reputations. On one side are financial heavyweights such as JP Morgan and Goldman Sachs with analyst Durlacher and City fund manager Tony Dye all predicting doom for house markets and a serious knock-on for the rest of the economy.
Backing up their view is the international monetary fund which last week pointed to a housing crash as the biggest single threat to the country's economic stability.
Taking the opposing view are Deutsche Bank and mortgage lenders Halifax, Nationwide, HBOS, all sharing the same opinion as Chancellor Gordon Brown and Bank of England monetary policy committee member Kate Barker that the double-digit annual creases will fade to zero as the market level off without negative equity rearing its head.
Figures from Nationwide last week put yearly house price inflation at 19 per cent, a £100 a day rise for the average home now worth £146,000.
So what does the IFA say to his or her client who is planning to buy residential property? The experience of one of the sector's best-known pundits reflects the dilemma that anybody faces trying to call the market.
Hargreaves Lansdown head of research Mark Dampier says: “Peter Hargreaves and myself got it wrong two years ago when we predicted the housing boom was going to end in tears. But property is an asset class like anything else and can fall. You cannot turn on the TV without seeing a get-rich-quick property makeover show – surely that is the sign that things are getting unrealistic.”
Dampier thinks the effect of buy-to-let investors, while not as numerous as first-time buyers, creates volatility. He says: “If the marginal buyer becomes the marginal seller and the rental sector is not giving the returns you can get elsewhere, we could see a correction.”
He says people should look back to the mood surrounding equities when the FTSE 100 was in the high 6,000s in 1999. “Everyone said equities felt like they were fair value at the top of the technology boom and could not see the reason why they would fall. But then when they did fall the reasons seemed obvious.”
Mortgage expert Mark Chilton believes IFAs should take great care when talking about the property market to any of their clients. He says the IFA advising on a straightforward residential mortgage should never be giving what amounts to investment advice. Further, he says the buy-to-let market has grown up with a massive gap in the regulatory framework.
Chilton says: “For buy to let, the mortgage broker can advise on the financing but who is the professional competent to advise on the housing market? There is a huge chasm in the regulation of this form of investment.”
Chilton says house prices will rise even higher when the pension simplification programme, coming in April 2006, allows residential property to be held in pensions. A combination of tax gross-ups and growth free from capital gains tax will prove too tempting for buy-to-let purchasers, pushing more money into the market.
He says: “You will see the market being fuelled and this will make it even harder for first-time buyers and key workers to enter the market. Politically, this move is completely naive but the Government can't afford a housing market crash.”
Dampier agrees that the pensions simplification plan will increase pressure, at least initially, on residential property prices.
Chilton even suggests that the policy move could create the final surge in prices that causes the whole house of cards to come tumbling down in the same way that the then Chancellor Nigel Lawson's buy now opportunity, created by the six-month final window for double mortgage tax relief in August 1988, triggered the devastating housing crash that started two months later.
Dampier says: “Maybe the start of the new pensions regime in 2006 will be the final priming of the pump like the rush to buy property by the August 1988 deadline – that is, if the market has not already slumped by then.”
Chilton says the current situation is different to what happened in 1988 because on that occasion a time limit caused a flurry of market activity because something was being taken away, whereas residential property in pensions is a break that is being given to the market.
Charcol senior technical manager Ray Boulger admits that it is in the interests of the mortgage lenders and the Treasury to predict a soft landing but says their views should not be discounted because of this. He says: “They have a bigger reputation to protect because it is their specialist area. The bears are looking at the market in a simplistic way. They say just because price to earnings ratios have always been between 3.5 and 5, the fact we are now around 5.5 means there will be a crash.
“But this is a stupid argument that ignores the fact that affordability is still low because of low interest rates and unless you think double-digit interest rates are coming back, then they will remain so.”
Twenty twenty hindsight is the only real way to call the market and on this crucial issue, reputations will be made and broken. More importantly, what is agreed by all parties is that a substantial fall would be devastating for the UK economy for a considerable time and the housing market must be treated with caution.