So are we heading for boom or bust?

After the summer slump, the market's poised for action. But will we be hit by meltdown or swept along by yet more rises? Rob Griffin pinpoints the key signs to look for, and selects the strategies for success – whatever comes our way
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The Independent Online

The boom scenario

Will it happen?

At a time when wage packets aren't getting any fatter, interest rates have risen quite steeply, so it seems unlikely that there will be a boom in the months ahead. Interest rates would have to drop substantially, salaries would have to rise and there would need to be an increase in demand, perhaps fuelled by a combination of immigration and a lack of new houses being built.

That's not to say that mini-booms can't happen on a local level across the country. Major investment in specific areas – the Olympics in east London being a prime example – can make them more desirable, with a resulting increase in demand for properties to buy, leading to higher house prices.

According to Mandy Bradley, director of Propertyforecasts.co. uk, there are a number of reasons why certain places can enjoy substantial rises in value. "It can be because employment prospects are on the up, or because of improvements to travel links. Maybe major investment is coming into the area, or a desirable school is being opened," she says.

According to the website's analysis of economic statistics, average UK prices will rise by around 5 per cent over the next 12 months, but prices in some areas could double by September 2012.

Hot locations include Pontefract in West Yorkshire, Midhurst in West Sussex, Neath in West Glamorgan and Perranporth in Cornwall. The likes of Glastonbury in Somerset and Windermere in Cumbria are also on track for double-digit percentage-point rises.



What are the first signs?

The first move is likely to be a spike in demand for properties – usually triggered by an increase in both the number of people in employment and the wages being paid, along with a reduction in the cost of borrowing.

For example, bumper City bonuses have helped to maintain the price of London properties, even while things have been cooling off elsewhere in Britain.

Residential property prices in prime central London increased by 3.9 per cent in July, according to estate agent Knight Frank, pushing the year-on-year increase to 36.4 per cent.

Another sign of a boom is that estate agents will be selling houses as quickly as they put them up for sale, and are posting leaflets through doors, saying that there is a long list of potential buyers just waiting to move in to their home.



Who stands to win?

Everyone with a property will experience gains in this kind of market, but the big winners will be those wanting to downsize, because they will be able to realise the gains and have thousands of pounds in their pocket.

Homeowners who don't want to move can also benefit by re-mortgaging and releasing the equity in their homes to fund high-street spending, home improvements or holidays abroad.

Those with a portfolio of properties – particularly those who have managed to clear any debts – will be in the money. In fact, this could be a good time to cash in the gains you have made. The temptation in a rising market, of course, is to stay in it for too long.



Who stands to lose?

First-time buyers will suffer badly. They are already being priced out of many towns and cities, so even fewer of them would be able to get on the property ladder if prices were to rise again without a major hike in wages.

It's a similar situation for those with growing families – if you're chasing a house with an extra bedroom, you might find that prices shoot out of reach. The National Housing Federation says prices are already 11 times the average wage.

It is warning that values could increase by a further 40 per cent in the next five years, taking the cost of the average house to £300,000.



What are the strategies for success in a boom?

Buy as much property as possible – and don't hang around. The longer you leave it, the quicker prices will rise, making it more expensive to buy.

If you are content with your existing home, you could consider snapping up buy-to-let properties, which will not only rise in value but give you an alternative source of income.

Generally, the best gains will be seen in "up-and-coming" areas. This is where local knowledge can be crucial. There are a number of ways to spot a future boom area, and getting this right could be the route to riches.

Look for areas where access is being improved, particularly road and rail links, as these could be attractive to commuters, or hunt for areas that are earmarked for major projects, such as a government-funded regeneration scheme.

Also consider towns and cities near areas where prices have risen sharply in the past – they usually benefit from the knock-on effect of people looking for the next most affordable place in the vicinity.

Once you've found the right town, skips and scaffolding are more signs that aspirational buyers are descending on certain streets, pushing prices up as they make their improvements.

The bust scenario

Will it happen?

First, let's look to the history books. Crashes have previously occurred when rising unemployment and soaring interest rates have put homeowners under severe financial pressure. In the worst cases, owners begin to default on their mortgage payments and are eventually forced to sell their houses cheaply, or have them repossessed.

And the here and now? Despite five rate rises since August last year, interest rates and unemployment are still historically low, and there's a relatively strong demand for properties. But there is evidence that some people are already having financial problems.

In the second quarter of this year, the number of residential properties being sold at auction rose by 32 per cent to 5,120 – driven by an increase in repossessions. The highest concentration of auction activity took place in the North-west.

Oliver Gilmartin, an economist with the Royal Institution of Chartered Surveyors, says: "With the full impact of interest-rate rises yet to filter through into higher mortgage costs, we continue to expect a rise in the number of homes going under the hammer into 2008."

Brits are already raiding their savings accounts to pay other bills, according to Birmingham Midshires' Saving Britain campaign. Amid speculation of further rate rises, people have withdrawn an average of £400 from their savings over the past three months – a 14 per cent increase on the last three months of 2006.

In addition, the increased cost of borrowing means people whose attractive two-year fixed deals are now coming to an end will see a sharp rise in their monthly repayments as they switch to a new deal.



How do we know that a crash is on the way?

One tip is to look for substantial numbers of For Sale signs in the neighbourhood, according to Miles Shipside, commercial director of Rightside.co.uk. If the same houses have been on the market for a while, "it's a sign of stagnation".

He says: "If it continues for a long period of time then that's obviously not healthy for the market as it means prices are way out of kilter with what people can afford and will have to be substantially reduced."

Keep an eye on the economy as a whole. There would need to be a fairly dramatic rise in interest rates to push up the cost of borrowing, along with a subsequent increase in living costs and a wage freeze; none of which look very likely at the moment.

It's only when people can't afford their monthly repayments that they run the risk of having their homes taken back by the lender. The key, therefore, is people remaining in employment so they can meet the cost of these higher interest rates.

Repossessions are bad news for the property market because the homes are usually sold off cheaply, which undermines the values of other houses in the area. If there are a substantial number of court-ordered sales then asking prices will have to fall in order to attract any potential buyers.



Who stands to lose the most?

Anyone who can't afford to keep up repayments, or who has to move either for employment or family reasons. Owners only suffer in a downturn if they have to sell, otherwise the losses are only on paper.

At greater risk are those who stretched their finances too far in order to buy their current homes – particularly those who lied about their income on self-certification mortgages.

Anyone re-mortgaging could also have problems, says David Hollingworth, spokesman for mortgage broker London & Country. "The problem is that people will not be able to get the same great deals that they could two years ago. Anyone coming off a fixed-rate deal will see their repayments increase."

Will anyone emerge unscathed?

Quite a few of us, according to Tim Crawford, group economist at the Halifax. The house price boom – which has seen the average property rise in value from £121,000 at the end of 2002 to almost £200,000 today – will afford some protection. "A lot of people have equity in their properties already because of the increases that we have seen in house prices over the past five to 10 years and they've also been reducing their debt over that period, so the majority of households should be generally well placed to survive any fluctuations in the market."

If a wobble does occur, it could be beneficial for anyone bold enough to move up the housing market, as the prices of prime houses start to drop. If everything loses value across the board, then the price gap between a three- and four-bedroom house also shrinks.



What are the strategies for success?

If you want to move and believe the crash is coming then you should sell before it actually happens, says Shipside. "If you need to sell quickly, then price very aggressively rather than wait for the market to drop," he explains. "When you sell, go into rented accommodation, wait for prices to reach what you perceive to be the bottom of the market, and then buy again."

Knowing when prices have hit rock-bottom is difficult. Improve your chances of working this out by speaking to estate agents, watching what's going on in the area and using your local knowledge of different roads.

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