London is booming. The economy hasn’t grown this fast since Queen Victoria was on the throne, champagne is flowing faster than the Thames and, last month, Sheikh Hamad, the foreign minister of the Gulf state of Qatar, reportedly splashed out £100m for a glass-encased penthouse overlooking Hyde Park, in the world’s most expensive development. The boom looks set to keep on, well, booming. Or does it?

Figures released by Halifax this weekend, showing that more than 7,000 houses changed hands for more than £1m last year — up from 3,600 in 2005 and just 2,006 in 2001 — certainly reinforce the impression of unremitting growth. Predictably, though, 62% of these properties were in the capital, with Chelsea, South Kensington and other districts of what estate agents call “prime central London” leading the pack (even if Altrincham, in the Cheshire footballers’ belt, also notched up some 40 £1m sales). Look past the elegant stucco-fronted townhouses, however, and a different picture emerges of what is really going on in the British housing market.

One of those who has questioned just how much life is left in the bull market is Tim Craine, director of London Development Research and co-author of the Red Book, a detailed guide to the new-build market in Greater London. “We’re not quite calling the top of the market,” Craine says. “But we want to point out that there are signs the market is out of balance and will be vulnerable to significant short-term losses when there are problems for employers in the global economy.”

Craine’s team scrutinised new-build schemes of 10 units and more in progress from Belgravia to the Thames Gateway, and found that developers in Greater London are consistently paying far more for land than traditional valuation methods would dictate — in some cases 30% more — in the expectation that house prices will catch up. “In today’s market, we see systematic, wilful overpayment for land,” Craine says.

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BACKGROUND

• The Market

• The Market

• Can property prices continue to rise?

• The Market

• Not worth buying?

Indeed, confidence that prices will keep on rising is so high that some developers in the suburbs have been deliberately holding back from releasing new homes. Yet, as Craine points out, they will eventually have to sell — and if they all have to do so at the same time, the downward effect on prices could be dramatic.

“Overly bullish expectations and overpayment for land mean the market is less stable than it might otherwise be,” he says. “ It is making us nervous.” Individual investors looking to buy property off-plan should be especially cautious. “Any investors who don’t do their homework thoroughly will soon find themselves in a dangerous place.”

Nationwide’s chief economist, Fionnuala Earley, agrees, noting that the building society’s latest survey highlights the fact that the public’s perception of the market is too bullish. “The housing market showed further signs of cooling during March,” she says. “The current rate of price growth will continue to slow as interest-rate rises feed through.”

One of the strongest warnings of a looming correction came last week from economists at Lombard Street Research, a market forecaster. “We are now clearly at the end of the house-price boom,” says Diana Choyleva, a director. “We think there will be a correction next year. Although it is unlikely to be as severe as the last crash, 2008 could be a difficult year.”

Indeed, venture out beyond the M25 and you could be forgiven for thinking a correction is already under way, largely under pressure from rising interest rates. A survey released last week by the National Association of Estate Agents revealed that 40% of members had noticed a downturn in residential housing activity as a direct response to the January hike. The market in parts of the Midlands and northern England, in particular, has slowed severely, according to the Land Registry.

“Compared with the late 1980s, the market is much more segmented,” says Richard Donnell, director of research at the property analyst Hometrack. “Interest rates have already bitten the mass market, where there are real affordability pressures. The market will continue to be very subdued. Eventually, affordability issues will even catch up with buyers at the top end. And pricing will reach a tipping point.”

Perhaps the most striking analogy comes from Craine. “When Wile E Coyote runs off a cliff, he carries on running,” he says. “I wouldn’t want to predict when he will fall, or when the market may fall. All I know is that prices can’t simply carry on rising uninterrupted.”

Reasons to be cautious

- A series of interest-rate rises has hit affordability, helping push up repossessions

- The boom in London is largely based on the strength of the City. Any wobble in the financial markets could have a rapid negative effect on sentiment

- Developers are overpaying for land in the expectation of continuing price rises

- The market in parts of the Midlands and northern England is already slowing

- Home Information Packs, compulsory from June 1, could add uncertainty

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