Buyers can still win the game

House prices won't crash as the economy slows

Channel Four's Big Brother may have dominated conversation at dinner parties in past weeks but that old favourite topic – house prices and what is going to happen to them – is now back. As fears abound of an imminent recession, some people may be worrying that a bust is about to follow the well-documented boom.

Certain indicators are beginning to make buyers rather jittery. Cambridge Econometrics revealed last week that house prices in the south of England are too high relative to income. The think-tank predicts a slowdown in growth in the coming year, combined with reduced activity in the City – leading to stagnation in the London housing market which will spill over into the regions. Talk of a US slowdown, along with companies laying off staff, and business confidence at its lowest level in years, are all testing the housing market.

"It comes down to consumer confidence," says Richard Donnell, head of residential research at FPD Savills, an estate agent. "It is still there at the moment but things are slowing down. The key is whether consumers are going to put things such as house purchases on hold for a few months. That hasn't been the case so far but I think it will increase towards the end of the year."

Sentiment plays a big part in the housing market. If people think prices are going to stagnate or – worse still– fall, they stop buying and delay moving home. Talk of rising unemployment and impending recession could be enough to do this. And that is when the bottom falls out of the property market.

But this has yet to happen, and the good news is that economists reckon a crash akin to that of the early 1990s is unlikely. While some companies are announcing redundancies, unemployment still fell to a 26-year low last week. Instead of a crash in property prices, a slowdown in price growth is expected.

The cost of the average home in England and Wales rose by more than 10 per cent in June compared with a year ago, according to the Land Registry. This was even faster than the 7.6 per cent annual rate recorded in the first three months of this year, but is thought to be down to a summer pick-up in demand that is expected to slow during the autumn.

What isn't expected is a return to the negative equity and all-time-high repossessions of the early 1990s because earnings growth has risen as interest rates have fallen, making mortgages more affordable. The Bank of England rate cut earlier this month means that mortgages are at their cheapest for 40 years.

"People are borrowing more [but] as a percentage of their monthly income, these are smaller amounts than in the past," says David Hollingworth at mortgage broker London & Country. "We don't think that interest rates are going to leap up to around 15 per cent as they did 10 years ago."

Home owners who are concerned about a possible increase in interest rates might want to exercise some caution. If you are stretching yourself more than you feel comfortable with in order to get on the housing ladder, think about opting for the security of a fixed or capped-rate loan. Fixed-rate deals aren't as cheap now as they were a few weeks ago but there are indications that they might come down again, particularly as there could be further rate cuts in the autumn. Mortgage payment protection might also be a good idea.

Mr Hollingworth recommends Woolwich's 5.59 per cent mortgage, capped until 30 November 2003. If you prefer a fixed rate, he likes the two-year deals on offer from Britannia (5.14 per cent) and Yorkshire Building Society (5.19).

If you want to fix for longer, Cheshire Building Society has a five-year deal at 5.59 per cent, while London & Country is offering its own loan, funded by Coventry Building Society, capped at 5.85 per cent for five years.