Beware of the bubble as home prices climb

Don't panic and rush to buy just because you're told prices are rising

Britain is flirting with another runaway rise in house prices, economists warned this week.

A majority asked in a Reuters poll put the chances at 50-50 or higher over the next five years.

Only nine out of 29 economists surveyed said the prospect of another house price bubble – where prices rise so fast they are at risk of a sharp correction – is small. But the other 20 were split between seven describing the risk as even, 11 as likely, and two as very likely.

Mark Harris, chief executive of mortgage broker SPF Private Clients, is also concerned about the risks of a bubble.

"With returns on cash hopeless, buy-to-let investors returning to the market in droves and the introduction of government schemes to help homebuyers, we have all the makings of a housing bubble so it is important to moderate and not get too carried away," he said.

With the Bank of England's base rate having never been lower and the new Bank Governor, Mark Carney, last week signalling that rates may not rise for three years, it's no wonder more people are thinking about joining the property ladder or taking advantage of the attractive headline rates to move home.

Meanwhile, competition among mortgage lenders has been getting more fierce, leaving average five-year fixed rates standing at 3.83 per cent, the lowest they've been for some time.

Also, the latest estate agents' survey from the Royal Institution of Chartered Surveyors published this week showed that home prices grew last month at their fastest rate since the market peak of November 2006. This has raised fears among potential homeowners that if they don't take advantage soon, the affordability of their dream home may climb beyond reach.

But rushing to buy could be a foolish and expensive mistake. It's wise to look for a home that you may be happy with for some years, rather than a property that you hope you may be able to sell at a profit in a year or two. If there is a bubble and price deflation, you're more likely to end up in negative equity – when you owe more than you borrowed – and stuck with a property from which you can't escape.

"When buying, always consider the three most-important factors of a property purchase – location, location, location," advised Mr Harris. "Buy sensibly, consider schools, transport, and if buying as an investment, opt for a property that tenants will want to live in, not one that you require.

"Buyers must also take care not to overstretch themselves; interest rates might not be rising until the third quarter of 2016 at the earliest but at some point they will."

There are ways for the short-of-cash to buy a home, not least through the Government's flagship Help to Buy scheme. Parents can offer a similar facility as some lenders accept them as guarantors for a mortgage. Alternatively, you can buy with friends, each owning a share of a home. There are also shared-ownership schemes run by housing associations.

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