The average price for a house has surged from £68,777 to £198,898 since 1997. The gurus of the International Monetary Fund contend that only 60 per cent of this increase can be explained by rising incomes and other fundamentals. The other 40 per cent is a mystery. This is just one of the reasons why they contend that the housing market in Britain may be headed for a painful reversal in its fortunes. A replay of the US sub-prime-induced property slump could be just around the corner.

The forecast will aggravate the gloomy mood of homeowners, squeezed by five successive interest-rate rises and every day confronted by more news of a slowdown in the market, plus the prospect of mortgage lenders turning much more cautious. The over-extended and over-indebted will be particularly miserable.

While the housing gurus all report a slowdown, they question some aspects of the IMF’s analysis. They argue that its thesis may not hold because Britain and America are not alike. The US has a glut of homes and oodles of space to build still more. Planning restrictions in Britain have led to a shortage of homes; demand is also boosted by immigrant workers. The latest figures from the Royal Institution of Chartered Surveyors indicates that supply continues to be tight. These factors should support prices, especially while the economy remains sound, although Dominic White of the investment bank ABN AMRO points out that the relative strength of the US economy failed to save its property market.

Fionnuala Earley, chief economist don’t expect very much growth next year, but a crash is not inevitable.”

How to fight your way out of a housing market slowdown

Do you have the clout to tough out the downturn? Emma Wells and Lucy Denyer sort victors from victims

BACKGROUND

• Housing market analysis: the plight of first-time buyers

• Home economics - January's shock house price stats

• Home economics - the property market

• The harder they fall

• Home economics

BACKGROUND

• Wise up to size

• The property market: October 21, 2007

• Shires fall to foreign land rush

• House price gloom as the wealthy turn away

How to beat a property market slowdown

The market is cooling. But learn the rules and it could work to your advantage

• Why won't my house sell?

BACKGROUND

• Empty homes: the mystery of the UK’s million vacant homes

• Opening bids: Why the Government must do something about Britain’s empty properties

• It’s dire in the shires

• Cash in on your biggest asset

Smoking ban: a drag on prices?

Paula Hawkins examines whether house prices have gone up in smoke

BACKGROUND

• Misery for over-extended and over-indebted

• UK house market is ‘heading for crash’

• The property market: October 14, 2007

• Held to ransom

Related Links

• Bank will slash rates 'if turmoil returns’

But complacency could be risky. It would be dangerous, for example, to say that sub-prime problems that lie behind the woes of the US could not be replayed here. Britain has a small but busy sub-prime sector lending to those with poor records; this accounts for 8 per cent of recent mortgages.

Ed Stansfield of Capital Economics, the most pessimistic of property market commentators, forecasts an overall decline in prices next year of 3 per cent. He said: “There is a tendency to treat sub-prime lending as if it is ring-fenced from the rest of the market. It is not and it is highly likely that it will have an impact on prices and confidence in the rest of the housing market.”

The way ahead is uncertain, but the IMF’s scenario still seems far-fetched.

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