Homes 'heading for the doldrums'

A PROLONGED period of stagnation in house prices is likely, says stockbroker Merrill Lynch. But it does not expect a crash as in Japan in the 1990s when prices fell 65% and 60% of households were plunged into 'negative equity'.

The Japanese bubble was inflated by deliberate policy. When it burst, policy mistakes made it worse, Merrill economists say. The Bank of England is unlikely to make the same errors.

But property prices have doubled since the Bank became independent and have risen 14% since it began lifting interest rates.

This is unsustainable, says Merrill's Ian Stewart. Rates - which the Bank of England's monetary policy committee held at 4.5% yesterday - may rise to 5.5%.

Prices will not collapse, but 'a prolonged period of weakness is not painless'. A return to long-term affordable levels would involve zero price rises for five years.

Builder Taylor Woodrow says the market is slowing. But its annual profits should beat market expectations of £429m. Smaller rival Galliford Try predicts profits ' substantially ahead' of last year.