House prices 'on brink of 10% slump'

London house prices are on the brink of a significant slide, according to one of the world's biggest investment banks.

A report by Merrill Lynch predicts a drop of at least 10 per cent next year, raising fears that a 1989-style crash is looming, the Standard can reveal.

The report bases its conclusions on the firm's assessment that "London now possesses characteristics which resemble the late 1980s housing boom".

Mark Hake, building analyst at Merrill Lynch, said: "It could be 10 per cent and it could be a lot worse than that. But it is impossible to say how much worse."

The cost of a home in the capital has shot up by more than 15 per cent in the last year and doubled since 1997. Until now, the consensus has been that while the rate of growth in house prices was likely to slow down, there would not be a fall in prices.

But the report describes the London residential property market as "increasingly and uniquely exposed to a sharp correction, initially in terms of overall demand, but also ultimately in pricing".

It is the first time a major financial institution has gone public with serious-concerns that London's housing market is vulnerable.

The report details several major factors which, it predicts, will combine to bring about the crash. It also says that low interest rates will not prevent a fall in house prices and any rise will only make it worse.

Merrill Lynch says the increase in people buying properties to let has been so great that the number of properties available on the letting market will soon outweigh the number of people looking for a home, leaving landlords with mortgages they cannot pay.

Property correspondent Mira Bar-Hillel writes: The Merrill Lynch analysis is based on what it sees as similarities with the late 1980s, which led to the 1989 crash. House prices in London then fell by between 25-50 per cent in three years.

However, the situation now is completely different. Factors to take into consideration are interest rates and unemployment, which are a third of 1989 levels, and mortgage payments, which are only 16 per cent of earnings - as opposed to 41 per cent in 1989.