Focus: So what are we supposed to do?

Don't panic, says Penny Jackson, but the governor of the Bank of England is right. There really could be a collapse in the housing market. Mike Bygrave meets those anxious to avoid getting caught out
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The Independent Online

There have been plenty of warnings about the danger of a fall in house prices but few as stark as that given by the Governor of the Bank of England last week. Mervyn King's message was blunt: borrow too much at your peril because the pace of house price growth in the past year has brought the prospect of falls much closer.

There have been plenty of warnings about the danger of a fall in house prices but few as stark as that given by the Governor of the Bank of England last week. Mervyn King's message was blunt: borrow too much at your peril because the pace of house price growth in the past year has brought the prospect of falls much closer.

We have been told many times that a crash in the housing market is imminent. Usually a few people panic but most go on as before. This time, however, it really does appear that the market is cooling. Latest figures suggest loans in May were down £1bn on April. Reports indicate a slowdown in the growth of prices and even small falls in value. So is there cause for panic? Yes - for those who have been seduced by huge loans and bet the family silver on investment properties. For the rest, business should go on as usual.

Anyone looking to trade up should welcome the prospect of lower house price values. Difficult as it is to persuade someone that the house they thought was worth £400,000 is closer to £360,000, a 10 per cent fall is far more valuable if your next purchase is for £850,000. In many areas, it has been all but impossible for people to finance the move to a larger home - so this change may help them.

Buy-to-let purchasers in London began to take fright 18 months ago, and if they start to retreat in areas of the country where prices are still rising that will help first-time buyers, who are often competing for the same properties. A recent report from estate agents Strutt & Parker found that last year more so-called affordable housing was acquired by property investors than by the young people for whom it had been intended.

Neither first-time buyers nor new investors are likely to have experienced anything but growth before. The risk of taking out large loans seemed negligible when values were soaring so high that debts paled into insignificance. But that will change. Analysts point out that in a deflationary world mortgages will be a burden for far longer.

Estate agents are already seeing the effects of the latestbase rate rise, which some believe to have been unnecessary as the market was starting to cool. "The second was sufficient. The third knocked people back into their armchairs," says Linda Beaney of Beaney Pearce estate agents in Kensington, London. She and others in the area are beginning to see an oversupply of flats on the market.

Yet it is as risky to gamble on price falls as it is on rises. People who sold at what they perceived to be the top of the market with the intention of renting until prices fell have had a long and fruitless wait.

All the same, there are those already getting cold feet about buying at what may be the top of the market. The horror of admitting that a house might be worth less a few months after buying it appears to matter more than its performance over the long-term. Many who were mauled by the negative equity tiger in the mid-Nineties lost their homes; and some never got on to the property ladder again.

However, anyone who survived that period is probably sitting on a home that has grown in value by 200 or 300 per cent and is probably using those gains to finance their children's first purchase.

The message from Mervyn King is not to stop buying property. He is warning that for those who borrow too much in the expectation of reaping rewards quickly there will be trouble ahead.

If you're buying a house to live in and you borrow within your means you will ride out any storm. But if you're buying to make a quick buck, be very careful. The more you bet, the more you lose.

Penny Jackson writes on property for 'The Independent'

The first-time buyers

'We know we've bought at the top of the market, but what can you do?'

Kate Watkins and Laurie Davison, both 24

"It's terrifying," says Kate, who is in the process of buying her first flat together with her boyfriend, Laurie, also 24. "We know we're buying at the top of the market, but what can you do? We've done everything we can to minimise the risk, but we are going into it thinking it could be worth less when we come to sell it."

Kate, an assistant editor for the book publisher Random House and her boyfriend, a management consultant, are both graduates of the London School of Economics. For the past 18 months, they've rented a basement flat in Islington for £180 a week. "It's tiny," she says. "One bedroom, very small, with something that counts as a bathroom - it's got running water, that's all you can say."

Last Christmas, Kate's father offered to give the couple £80,000 towards a deposit. "We'd worked out that we would have to save until we were 30 before we could think of buying on our own. I really don't understand how first-time buyers in London do it without help. We reckon we've paid out nearly £10,000 on rent in the past five years," she says.

The couple set themselves a budget of £220,000 but "we thought we'd be able to pick something up for £200,000. We were looking in Hackney, for god's sake!" They settled for a two-bedroom flat over a betting shop in London Fields, between Islington and Hackney, for £239,000. "We never thought we'd end up over commercial premises but we love the inside and we love the area." The second bedroom is in case they have to rent it out in the future, although they've factored a 2 per cent increase in interest rates into their calculations. Their £170,000 mortgage is fixed at 4.9 per cent but only for the first two years.

"Buying a house does require such a commitment in terms of knowing you're going to have to earn enough to do this," says Kate. "We won't be able to go on holiday again ever! It's a little sooner than we planned to buy, but we had to decide, do we turn down my dad's offer? The answer was clearly no, because we'd never be able to save that much on our own and we'd end up living in a starter flat, probably miles out of town in Ilford or somewhere."

According to a recent MORI survey for the Joseph Rowntree Foundation, 52 per cent of homeowning parents believe their children will never be able to buy without parental gifts or loans. Parents expect to spend an average of £7,220 in northern England to £23,670 in the South helping their children,with most regarding the money as a gift.

"I think there'll inevitably be a slowdown, possibly a dip in prices," says Kate. "The question then becomes, can you sustain the dip and stay in the place you have bought for long enough?

"If you try to read the market, you never know until it's too late. At some point, you have to take the plunge."

The renter

'I'd rather live in a place I like than make money on property'

Jonathan Thompson, 32

As a single man about town with a high-flying media job, Jonathan Thompson should be leaping up the London property ladder. Instead, he's sitting on the sidelines, sharing a rented flat in Notting Hill, west London. "Like a lot of people, I've felt the market was about to turn in the past couple of years," he says. "I felt it was not sustainable, so now is not a good time to buy. That's been very much on my mind recently."

The more people like Jonathan have waited the more prices have risen, increasingly beyond their means. Those who were saving and waiting for a fall have spent much more than they had hoped on rent (in some cases everything they had saved for a deposit). Only a crash can bring them back into the housing market.

As head of strategy for Channel 4, Jonathan's job is to plan for the long-term. "I've had friends who've bought and done fantastically well financially," he admits. "No one who's heard all the stories about people whose flats and houses doubled in value in three weeks can help thinking to themselves, 'Just a minute, my savings aren't performing that well!' I'm sure everyone in my position has thought, 'Oh god, I've got to get on the property ladder.'"

So why hasn't he done it? After all, he's currently paying £1,100 a month for half the rent on a flat off Westbourne Grove. Isn't he pouring all that rent money down the drain? "Property prices in London are so astronomical," says Jonathan. "To get a tiny studio flat in my area could cost as much as half a million pounds. The idea of paying that much is beyond me in every sense of the words."

It's not as if Thompson can't afford to buy his own place. Though he won't give precise figures, he says his salary is "high for my age" as befits his high-pressure job with very long hours. "To get something I could afford, say around £250,000, I'd probably have to go south of the river, maybe to Clapham, maybe farther out. And the fact is I like the area I live in and I like the flat I rent. It's more important to me to live somewhere I enjoy than to try to make money in the property market."

"It might be different if I was to get married or live with someone. But my life is my work. I know people my age who've bought flats and houses and they're always having to rush home to deal with boilers, plumbers, refurbishing the roof."

He, on the other hand, enjoys spending his disposable income:"I put quite a lot into my pension scheme at Channel 4. After that, I like eating with friends in good restaurants, I like consumer electronics, iPods and digital TVs and the latest mobile phones."

The truth is that he seems almost as happy with his life as with his flat. Why risk it by entering a dodgy market?

The new landlord

'We're getting the same rent as seven years ago. There are too many people buying to let'

Justin Kennedy, 25, and family

Seven years ago the Kennedy family did not own a single flat for rent. Today, they own 100 in central London and West Sussex. The state of the housing market has them worried. "We're getting roughly the same rents today as we were getting seven years ago," says Justin Kennedy. "Property prices are much higher, now interest rates are edging up. I think a lot of people are going to have to get out."

The Kennedys also own eight fast-food outlets. "Without that business, the property business wouldn't be sustainable," says Justin. "We are a financially secure company, and not just in property - so if we are worried, and we are, I don't know how the individual who has gone into buy-to-let is managing."

If he sounds breathless he has a good reason. "I'm running round our properties all day and I'm going home to my dad at night and saying, 'We're doing all this work, losing money, just holding on and hoping it will come back.'"

The Kennedys had the resources and vision to get into buy-to-let in the glory days when "interest rates were low, rents were high and we saw quick returns". Even so, they began by accident. "My dad and I drove past this new development in Crawley. We went in and this sales lady tried to sell us a flat for £60,000, and we said 'OK, we'll take two for £50,000 each', never thinking they'd agree. Suddenly, we found ourselves with two flats and no idea what to do with them. We called an agent, they let the properties the next day, and lo and behold, the cycle of price rises and easy lets began. We thought, 'This is an easy job, isn't it?'"

Since then, says Justin, "the whole world seems to have heard about these good returns and everyone wants a penny of it. There are too many people in the market and that's how they shoot themselves in the foot."

Experts like Geoff Marsh at London Residential Research agree. He reckons it would take five years just to break even on a £249,000 buy-to-let property paid for with a 20 per cent deposit, 5 per cent annual compound price growth, 2 per cent rental income growth and base rates at 4.25 per cent. Tweak the figures in the negative direction and you're looking at a loss.

However, individual investors such as Simon and Rachel Brickman are still convinced the sums add up. "We got into buy-to-let in 2000 when we moved out of Docklands to a village near Newbury and decided to let our London flat," says Simon. "Now we've just bought our second property, a three-bed flat in Oxford. We bought it for £250,000, put £15,000 into improvements and have let it to a group of nurses."

The Kennedy familybuys properties that are less than seven years old, to appeal to their target renters who "prefer living in places with minimal maintenance - and fitted kitchens!" says Justin. "We can afford to do it, but we'd say the average person shouldn't invest at current prices. There will be a lot of casualties and that will help the professionals, who will get cheap properties again."

Justin still lives with his parents in Stanmore, north-west London, but is thinking of moving "to live the high life in one of our flats in town". And will he pay rent? "I'll probably help with the mortgage."