'Don't panic' over house price crash warning

British mortgage lenders today sought to reassure homeowners following a “stark warning” that the risk of a house price crash was increasing.

The Governor of the Bank of England, Mervyn King, said prices were now “well above what most people would regard as sustainable in the longer term” following 20% rises over the past 12 months.

Addressing a dinner of CBI Scotland, he warned would-be buyers to be cautious of taking the plunge, saying the chances of falls in house prices were now “greater than they were”.

But he later said he was not predicting a housing market crash, adding that there were some early signs from surveys that the market was beginning to slow down.

Philip Shaw, an economist at Investec, said: “The Governor delivered a very clear broadside for the housing market. It is a stark warning to homeowners.

“Clearly what he is trying to do is talk down the housing market to limit the extent to which the Monetary Policy Committee has to raise rates again.”

He said he had become more nervous about the prospects for the housing market and, while he still expects a soft landing, the risk of a more dramatic correction had increased, although homeowners should not panic.

Mortgage lenders were also quick to insist the market was not heading for a 1980s-style crash.

Martin Ellis, chief economist at Halifax, said: “We think the market is heading for a gentle slowdown and we continue to think that is the case.

“The market is well supported by sound fundamentals with very high levels of employment and low interest rates.”

He added that further rises in interest rates would weaken demand from potential buyers which would slow house price inflation.

Halifax said that during the late 1980s interest rates doubled over 15 months, peaking at 15.4% in 1990 and remaining in double digits until September 1992.

The group said that, even though the Bank of England had raised rates by 1% since November, a base rate of 4.5% was still low.

It added that, although house prices were now equal to around five times average earnings, lower interest rates meant repayments as a percentage of total pay had fallen from 35.7% in 1990 to around half that level now.

A Council of Mortgage Lenders spokeswoman said: “The fact that house price inflation has remained strong for longer than people expected has increased the chance of a sharp correction.

“But no-one is saying this makes it likely. The balance of probability is still for a soft landing in the housing market.”

A spokesman for Nationwide Building Society added that the likelihood of a crash was “very small indeed”.

Meanwhile, a survey from the Royal Institution of Chartered Surveyors said the pace of house price growth has slowed for the first time in six months as speculation that interest rates would rise steeply this year had dampened buyers’ mood.

It said price growth slowed slightly during May with 44% more chartered surveyors reporting price rises than those who saw price falls, down from 46% in April but still well above the long-term average.

It added that it had also seen the first fall in the number of people looking to buy a home since December and the biggest since April 2003 when uncertainty over the Iraq war temporarily suppressed demand.