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Putting the Bootle into home market

Anyone willing to declare that “the housing market is in significant danger of crashing” to a room filled with building society chief executives is a brave man.

But if this prediction comes from leading economist Roger Bootle, a former adviser to the last Conservative Chancellor Kenneth Clarke and now a specialist adviser to the House of Commons Treasury committee, it is bound to make people sit up and listen.

Speaking at the recent Building Societies&#39 Association conference in Bournemouth, Capital Economics managing director Bootle declared that a housing crash is a real possibility.

He warned: “The current rate of increase in house prices is unsustainable. Boom time for consumers is coming to a close.”

Bootle says people&#39s earnings are not rising in line with house prices and that mortgage debt as a percentage of income is higher than in the 1980s.

On top of this, he expects unemployment to rise, saying the number of job ads in the press has fallen by 40 per cent year on year while the jobless total has risen by 800,000.

He says the London market paints “a more worrying picture” because it is approaching the late 1980s&#39 peak and is giving “cause for concern”.

Some mortgage experts agree that the market is starting to reach a critical point, especially in London, where first-time buyers are finding it increasingly difficult to get on the housing ladder.

Prudential Premier Mortgage Service national mortgage manager John Malone says: “Having worked thr-ough three property crashes in the 1970s, 1980s and 1990s, I was hoping that we would not experience one in this new century. But the signs are not good. If first-time buyers are taken out of the market, it leads me to believe that there might not be a crash but a potential pricing correction could be on the way.”

But the majority of commentators take the view that the property market is far removed from the boom and bust years in the last three decades of the 20th Century and rule out the prospect of a crash.

Wriglesworth Consultancy analyst John Wriglesworth has a much more optimistic view of the market. He says: “Bootle takes the approach that the bottle is half-empty while I look at it as half-full.”

First, Wriglesworth says interest rates in the previous crash were as high as 15 per cent compared with the current level of 4 per cent, the lowest in 50 years.

Second, he says 68 per cent of the nation are homeowners, the vast majority of whom have owned a property for at least 10 years and have seen a rapid growth in the amount of equity held in their properties.

Wriglesworth says: “Mortgage repayment as a percentage of income is 14 per cent, well within an affordable range. Unemployment is low and consumer confidence is still rising. There is more chance of Dolly Parton sleeping on her front than house prices falling.”

The Council of Mortgage Lenders leans more towards the views of Wriglesworth than those of Bootle.

CML spokesman Bern-ard Clarke says: “We are expecting the market to cool down as first-time buyers are finding it increasingly difficult to enter the market and higher interest rates are pushing up debt servicing costs.

“But the precise timing and extent of the slowdown is hard to predict. We believe there is nothing to say interest rates will rise significantly in the foreseeable future.”

Nationwide, which monitors house prices on a monthly basis, is adamant that the outlook remains positive.

Nationwide group economist Alex Bannister says: “With mortgage rates set to remain relatively low in the next few years, it is likely that house prices could be even higher without major concerns or a dramatic slowdown.”

But he says affordability varies and in London, where prices are nearly eight times the average take-home pay, first-time buyers are finding it difficult to enter the market without a large deposit.

Specialist lenders, which tend to lend to more vulnerable customers, such as those not in permanent employment, the self-emp-loyed or people with poor credit ratings, are also erring on the positive side.

Verso, a subsidiary of Britannia Building Society, believes the demand for housing is unlikely to dec-line and that the market is set to remain buoyant.

Director of business development Eddie Smith says: “Even if mortgage rates went up by 2 per cent by the end of the year, mortgage payments will still be manageable. Lenders have been a lot more responsible than in the 1980s.”

Another specialist lender, Sun Bank, shares this view, pointing to several key differences between now and the 1980s. Marketing director Chris Cummings says the level of interest rates is lower and rapidly rising unemployment is unlikely although he warns that increased National Insurance payments could lead companies to cut the number of staff being recruited.

Cummings concedes that the market is not 100 per cent rosy, especially for people buying within the M25 area.

Intermediaries also tend to disagree with Bootle&#39s gloomy prediction, with Savills saying that although there will be a slowdown, this will not constitute a full-blown crash.

Savills director Mark Harris: “We will probably start to see a natural slowdown in the summer which will take the edge of the market. Prices will slow but they will not slip into negative.”

London & Country Mortgages broker David Hollingworth agrees with the view that a slowing market does not equate with a crash.

He says people have learned from the past, with borrowers taking steps to insulate themselves against changes in the market and lenders taking a more measured approach.

Bootle has certainly set the cat among the pigeons with his warning that a crash is a real possibility. With his experience and background, this is a prediction that the mortgage industry cannot afford to ignore.

For now at least, the majority of commentators are quick to discount his claims that a crash is on the way although they do expect a slowdown and are warning of the precarious nature of the London market and the situation that first-time buyers are facing.

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