House price 'meltdown'

Fears of a looming meltdown in the property market deepened today after shock warnings of a dramatic shortage of buyers.

Two major property companies said their profits would be lower than expected because purchasers are no longer clambering to get on the property ladder.

There is particular concern that increasingly cautious first-time buyers have "gone on strike" until prices start to fall to more affordable levels. The latest jitters comes the day after a doom-laden report from the International Monetary Fund, which warned of a possible sharp drop in house prices in Britain. Some economists are now forecasting that the overheated market could tumble by as much as 20 per cent.

In its profit warning, housebuilder Countryside Properties told the City that five successive interest rate rises had sapped confidence from an already cooling market.

For the first time, homes at the lower first-time buyer level were starting to be hit, it said. In its statement the company said: "Whilst this has been particularly the case in respect of homes above ?300,000, we have begun to experience a slowing down in market conditions for some lower-priced homes, particularly in London and the South-East."

The statement added: "Potential purchasers are taking longer to commit themselves and are increasingly seeking to negotiate harder terms before proceeding to purchase."

The warning was echoed by Britain's largest estate agency chain, Countrywide, which owns Bairstow Eves, John D Wood and Faron Sutaria. In its Stock Exchange statement, managing director Harry Hill said the number of house sales in the pipeline in August was 20 per cent down on last year.

He added: "The cooler market did continue through August and appears to be persisting into September."

Property experts said the Bank of England's most recent quarter-point interest rise in August, which lifted rates to 4.75 per cent, had been the final straw for many buyers.

This has been exacerbated by gloomy media reports of the latest property price surveys. Christian Walton, marketing manager at London agents Marsh & Parsons said : "Inquiry levels have not ticked up since the summer lull and at the same time a lot of stock has come on the market from vendors who want to get out before things get even worse.

"This week seems to have been particularly quiet following all the bearish reports in the media. Prices have already cooled by five or six per cent since June and the number of people walking through the door is about 15 per cent down on last year."

Agents say the cooling has been most marked at the lowest ends of the market as first-time buyers decide to bide their time. Over the past two years, the proportion of first-time buyers has sunk to an alltime low of just over 30 per cent.

Historically, new buyers have accounted for around 40 to 50 per cent of the total.

Average property prices in London of around ?250,000 are at an all-time high of eight times typical first-time buyer salaries.

Ed Stansfield, property economist at Capital Economics, said first-time buyers should wait at least another 12 to 18 months before getting into the market because further falls are on the way.

"We're looking to see a 20 per cent peak-to-trough fall in house prices over the next two and a half years. We think they will fall steadily at around six to eight per cent a year before they start to bottom out and resume growth in line with average earnings."

He said buyers no longer regarded buying property as "a great binge of free money" and were now more concerned about getting into the market at the top and seeing prices falling away.

However, economists do not believe that the falls will be as damaging and long-lasting as in the negative equity disaster of the early Nineties because interest rates are much lower and unemployment is almost non-existent.

Mr Stansfield also said that London could be cushioned from the worst of the falls as prices in much of the capital have been stagnant for the past two years.

The most vulnerable areas were those that had seen rocketing prices in the past year, such as Wales, the North-East and the east Midlands.