Bank warns of big drop in house prices

Fears of a housing crash grew today after another big name in the City predicted a major fall in the price of homes.

Investment bank Goldman Sachs says it believes house prices will dive by up to 15 per cent over two years from the end of this year.

Its forecast comes only days after leading City fund manager Tony Dye - nicknamed Dr Doom - said he believed the London housing market will "end in tears" and reduce in value by 30 per cent over the next five years.

Goldman Sachs says it believes that house prices will come down as interest rates rise this year.

Its senior economist Ben Broadbent said: "The housing market is overvalued - I don't think that's contentious - so it's vulnerable to a fall.

"What is uncertain is the timing and amount and what effect a fall would have on the economy."

Interest rates were left on hold this month by the Bank of England but are now widely expected to be raised at the meeting of the monetary policy committee in May, in a move to try to control inflation and keep a lid on rising house prices.

The latest figures show that the housing market is continuing to boom - whichever set of statistics you believe.

Government figures show prices rose year-on-year by 9.8 per cent in February, valuing the average home in London at £243,231.

Britain's biggest lender, the Halifax, says it believes house prices throughout the country are rising by 18 per cent a year.

The average house now stands at a record price-to-income ratio, and the Bank of England is worried about the huge level of borrowing against property values.

Fears of a crash have been highlighted this week after the comments by Mr Dye, well known as a contrarian City commentator. He said the recent rise in the value of houses has been "silly" and that only a combination of low interest rates, greed and the "herd instinct" was keeping prices up.

He acquired his nickname of Dr Doom when, as chief investment officer of the Phillips & Drew managed fund in the late Nineties, he repeatedly predicted an apocalyptic end to the dotcom boom.

But views among City specialists that a housing crash is on the way are gaining currency.

Investment bank Durlacher, in a report entitled Bubble Trouble, is also predicting a 30 per cent crash in the market - perhaps as much as 45 per cent in some parts of the country - over the next five years.

As prices in London spiral out of control, property experts claim to have found 10 signs to spot the next up-and-coming area.

The list compiled by Jonathan Haward of County Homesearch Company includes: