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Investment view

Is the long bull market in property running out of steam? Back at the end

of the 1980s when residential property went briefly berserk in anticipation

of Chancellor Lawson&#39s move to end dual tax relief on mortgage interest,

the upcoming bear market in houses was signalled by a downturn at the top

end of the scale. Expensive inner London areas were the first to warn that

perhaps the party was coming to an end. If you believe the figures from top

London estate agent, Chesterton, they could be sending the same message

this year.

More than a quarter of the value of Chesterton&#39s shares evaporated when it

issued a profit warning and announced that sales of London homes in the

£1m-plus bracket had suddenly fallen sharply. Unsurprisingly, other

well known upmarket agencies also saw their shares downrated. The property

slump of the early 1990s is still too close to people&#39s minds to be

ignored. Then negative equity became commonplace and repossessions were the

order of the day. It could not happen again so soon. Or could it?

Life was certainly very different a dozen or so years ago. The sharp fall

in house prices was due in no small measure to a reaction to the very rapid

rise of the preceding two years. Aside from the ending of dual tax relief,

money had been pumped into the economy in a misguided attempt to head off

any consequences of the crash of 1987. Not so long after the peak of the

boom, interest rates were forced sharply higher to help quell the rising

tide of inflation, created by the imprudent measures of the tax-eliminating

Chancellor. This exacerbated the downturn in the property market, hence the

considerable pain felt by homeowners in the early to mid-1990s. This factor

helped deepen the recession that dearer money engendered.

Our own economy seems set for a slowdown now so the wealth-diminution

effect from lower property prices could prove most damaging. However,

circumstances are different. Interest rates are significantly lower and,

even if forced up by an MPC concerned that inflation is not dead, are most

unlikely to return to double-digit levels. There is also, if the estate

agents are to be believed, a shortage of suitable properties at the upper

end of the market, a shortage sufficiently critical to limit the extent of

any fall.

Nor are there any signs a downward pressure elsewhere in the marketplace.

Indeed, bank mortgage lending grew by 13 per cent last month and the

average price of a house in the capital broke through the £200,000

barrier. This seems the sort of money that only the seriously well off can

countenance. But according to our chief economist, Simon Rubinson,

affordability remains a positive note in house ownership. A combination of

low interest rates for a prolonged period, attractive mortgage deals amid

considerable competition and generally buoyant salaries, particularly in

the service-industry-dominated South-east, has helped keep the multiple of

house prices to income at a level where a significant retrenchment across

the board does not seem necessary.

This is not necessarily the case at the top of the market. The abrupt

ending of the dotcom boom and generally indifferent markets will have

ratcheted down expectations for bonuses this year. Job cuts are back in the

Square Mile .

Whether this has any implications for the buy-to-let market is another

matter. As an anxious father seeking to ensure his son does not join the

ranks of the homeless, I can find no sudden increase in the availability of

rented accommodation or any fall in the cost of housing which, in London at

any rate, seems very bad value – to the tenant. But it would be no more

than prudent to recognise that no market can continue to rise indefinitely.

DOCE:

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