Homeowners boxed in as property prices wobble

A slowdown is good news for first-time buyers who have been all but priced out of the market

Talk of whether the property market is going to crash or not has become almost an obsession for those who like to discuss the value of their home around the dinner table. And last week's figures from the UK's biggest building society, revealing the first drop in house prices for three years, will not have made for comfortable conversations.

Talk of whether the property market is going to crash or not has become almost an obsession for those who like to discuss the value of their home around the dinner table. And last week's figures from the UK's biggest building society, revealing the first drop in house prices for three years, will not have made for comfortable conversations.

Nationwide building society reveals that house prices fell by 0.4 per cent in October, the first drop since October 2001. This means the average house price is now £152,159, down from £153,727 in September and July's peak of £154,299. But while evidence of a slowdown in the property market gathers momentum, it would be premature for homeowners to start panicking.

Nationwide reveals the annual rate of house price inflation was 15.3 per cent in October - a sharp slowdown from 17.8 per cent in September. But this time of year tends to be a weaker period for house price growth, and if prices remain static until the end of the year, prices will still be 12 per cent higher than they were a year ago.

However, this is still 3 per cent below Nationwide's forecast for this year, which it made last December, illustrating that the slowdown may have come slightly faster than it envisaged. "This is in part a result of ... weak, real take-home pay growth, rising interest rates and stretched affordability, acting as a drag on the market," says Alex Bannister, Nationwide's group economist.

But he remains broadly optimistic in the longer term. "Despite price growth over the past three months being slightly weaker than we had expected, developments remain consistent with our view that over the coming years house prices are more likely to grow at a very subdued rate rather than fall sharply," he adds.

Most property analysts have ruled out the likelihood of a crash: instead, they believe prices will continue to cool at a slow, measured pace. Experts point to a soft landing rather than a collapse similar to the one experienced in the late 1980s and early 1990s, as long as the economy continues to grow and the jobs market remains strong.

The other influencing factor is what happens to interest rates. Despite five rate rises this year, many analysts believe the base rate is near its peak and may actually start to fall next year. If the base rate does peak at around 5 per cent - it is currently 4.75 per cent - it should encourage buyers to return to the market. Further encouragement will be provided by competition among lenders for business and the subsequent wide choice of deals available.

A slowdown in price growth is also good news for first-time buyers who have been all but priced out of the market. Price growth isn't sustainable at the levels we have seen: since 1999, house prices have more than doubled. With the growing gap between affordability - how much we earn - and house prices, something had to give.

With so much resting on consumer confidence, it's just as well Nationwide believes its latest statistics won't cause panic. "Our view is that the moderation in price growth expectations will not translate into widespread panic and that the market will experience subdued levels of turnover and price growth," adds Mr Bannister.

At the top end of the market, the picture is slightly rosier. The Halifax, the UK's largest mortgage lender, last week revealed an increase in the number of £1m properties sold during the first six months of this year, following a decline in 2003. Some 1,938 million-pound properties were sold in the first six months of the year, compared with 1,204 in the first half of 2003. There has been an increase in the number of sales above £2m, with 308 properties sold in the first six months - 50 per cent higher than this time last year.

But less encouraging were figures released last week from the Department for Constitutional Affairs, revealing a rise in repossessions. There were 18,513 court actions to evict families between July and September, a 15 per cent increase on the same period last year.

These are still historically low levels, although lenders admit that they expect the numbers to rise slightly in the coming year, and emphasise the importance of not over-stretching yourself when taking on a mortgage.