British economists predict market crash if prices keep up

A British research group is to publish a report today regarding house price increases, which indicates British home owners could be so financially stretched as to trigger a house price crash.

The Centre for Economics and Business Research will warn that the cost of supporting a mortgage on the average British home is already eating up more than 38% of a household's typical disposable income, and predicts that the share will go over 40% this year, for the first time in three years

This debt-servicing ratio is forecast to hit 42.5% this year, accelerating to 46.5% in 2006.

In London, it will breach 61% within two years, although that will still be well down on the 89% high seen in 1989.

Douglas McWilliams, CEBR director said when the ratio has gone significantly above 50% in the past, it has always fallen back.

"If prices continue to rise for the next two years at around the current rate, a house price collapse will be unavoidable," he said.

Bank of England's Governor Mervyn King previously suggested that recent double-digit house price hikes have been justified, because, in an era of subdued inflation and low interest rates, affordability has dramatically improved.

If mortgage-servicing costs rise, as the CEBR predicts, that will not be the case, and affordability may affect the entire property market, rather than just first-time buyers, as at present.