Negative equity risk for London buyers

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First-time homebuyers in London face a growing risk of being plunged into negative equity by a correction in house prices, an economics analyst warned today.

The ratio of house prices to household incomes in the capital is almost as stretched as it was at the peak of the boom of the late 1980s, Cambridge Econometrics said.

It said that it did not expect a repeat of the crash of the 1980s but added: "The sharp decrease in affordability in London and the South-east makes it increasingly likely that some form of correction will take place."

The report echoes a warning from Nationwide building society that current house price inflation was "unsustainable". Its figures show London house prices are growing by 17 per cent a year.

Cambridge said a "crisis" would need a trigger, such as a resurgence in inflation and interest rates or a sharper global slowdown accompanied by heavy job losses in the City of London.

"A period of stagnation in the currently overblown housing markets seems likely," it said. "First-time buyers are an important influence on the overall market and this group is evidently the most exposed."

It said speculative demand had boosted London house prices, especially in the last few years, and that this had pushed prices in the capital strongly out of line with other regions of the country.

Cambridge stressed that it was forecasting "continuing modest growth" in average UK house prices this year.