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THE turmoil in the financial markets that sparked the Northern Rock crisis may have put an end to the London property boom and may further dampen house price rises in the rest of the country. London, the South East and parts of the country that have been boosted by City money over the past few years are likely to be hit by a fall in City bonuses and job losses in the financial sector, as the full effects of the credit squeeze debacle emerges.

Other areas, such as the North of England, where property prices have not been pushed up by London’s mini-boom, will be less affected.

Although the immediate panic over savings held by the Newcastle bank subsided after the Government intervened to safeguard deposits this week, the market upheaval over the last few weeks has already dented confidence among house buyers.

Asking prices fell by 2.6 per cent this month, reversing the gains of the previous five months, according to Rightmove, the property website. The fall was the second biggest recorded in the six-year history of this index. Figures also show that new buyer inquiries have fallen for nine straight months. It is still not clear how the Northern Rock crisis will affect the property market over the next few months. But what can we expect?

Is a crash looming? For all the doom and gloom, economists and property experts believe that a 1990s-style property crash is very unlikely. Martin Ellis, an economist at the Halifax, said: “Higher interest rates meant that the market was slowing down anyway, even before the troubles in the financial markets. But the fundamentals remain strong. Employment is high, the economy is growing, interest rates are still historically low and, most importantly, the supply of property is still tight.”

Although the number of buyers has dwindled there are still not enough houses to go round and Simon Rubinsohn, chief economist at the Royal Institution of Chartered Surveyors (RICS), sees no signs of this changing. “Unemployment is not picking up and forcing sales. We need quite a big rise in unemployment for that to happen.” The last big property crash was fuelled by a rise of unemployment from 1.6 million in 1990 to 3.2 million in 1992. The potential City job losses of between 5,000 and 10,000 is tiny by comparison. However, it is likely to affect the most buoyant part of the property market – the top of the market in London where prices have been pushed up by big City bonus payments over the last couple of years.

So it’s stagnation, then? The strength of the market in London has obscured the fact that house prices have been pretty flat in much of the country throughout most of this year. Interest rate rises and affordability pressures have already subdued the market in the parts of the UK where City bonuses and wealthy foreign money fail to reach.

At the bottom of the market, buyers struggling to get a mortgage could be affected as financial institutions review their lending practices and restrict credit. Norwich Union is just one lender that has already stopped issuing loans to those who can not afford a deposit. This could particularly affect struggling first-time buyers who rely on large loans to get their foot on the ladder. Many homeowners are already paying more for their mortgages as lenders raise the cost of borrowing.

Buyers everywhere are likely to become even more price-sensitive, refusing to pay over the odds. Richard Donnell, of Hometrack, the property data company, said: “Pressures will hit asking prices rather than the underlying value of property. Transaction prices are unlikely to take such a big hit.” Donnell added that serious sellers would have to be more realistic about pricing their homes. “There are a lot of sellers who just want to try their luck. They will probably end up taking their homes off the market.” The restricted supply of homes for sale is likely to shore up the property market and keep prices from falling.

Could prices even rise? There is not much optimism in the property market. Even estate agents are being cautious. Neil Chegwidden, of Cluttons, said: “That several London investment banks have frozen recruitment and some are laying off staff are not good early signs but it is still most likely that stability will be restored.” Although Central London prices are almost 20 per cent higher than a year ago, according to figures from Cluttons, prices in sought-after areas such as South Kensington, Chelsea, St John’s Wood and Hampstead have seen no price rise in the past quarter.

Ultimately, the health of the property market will depend on buyers’ and sellers’ confidence. There are no fundamental reasons why it should not be business as usual for serious buyers with a good credit history or for sellers who price their homes sensibly. But uncertainty and fear can be a deterrent. As David Forbes, of Savills, said: “Having had precious little to view, buyers think they may be able to pick up bargains. Sellers are wary and will wonder if this is the wrong time to sell. There is a hiatus as people wait and see.”

What does Northern Rock’s crisis mean for you? Go to timesonline.co.uk/northernrock

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