Threat of British housing market crash remains

British house prices have soared since Prime Minister Tony Blair took power in 1997 but the threat of a crash is a major economic risk in coming years whether or not Labour clinches a third term this May.

Average British wages at £22,000 a year have climbed 15 per cent since 1997. During the same period the average price of a home shot up over 140 per cent to nearly £164,000, according to HBOS Plc, the nation's largest mortgage lender.

Climbing house prices have helped sustain a consumer boom that has only recently begun to falter and policymakers are aware that if the market were to slide the already uncertain outlook for household spending could look even more fragile.

Many housing market experts - as well as international organisations like the International Monetary Fund and the OECD - are warning that the housing market has probably risen too far too fast and poses a threat to the economy.

But equally no one is quite sure what could precipitate a crash when interest rates and unemployment are at historically low levels.

"There is a one in three chance that you do get a trigger, that interest rates rise more aggressively than we expect or the global economy slows down sharply and leads to higher UK unemployment," said John Butler, UK economist at HSBC.

"If either of those happen you could see a 30 to 40 per cent fall in house prices," he said.

Falling interest rates and a cultural disposition in Britain to own rather than rent property, along with an efficient, variable-rate mortgage market with plenty of banks competing have created ideal conditions for a housing market frenzy.

British rates have been on the rise since November 2003 but have remained on hold for half a year. Speculation in recent months that they might fall later this year has likely brought back some optimism into the market, for better or for worse.

In recent weeks, talk of another rate hike has resurfaced, maybe even as soon as May. One Bank of England Monetary Policy Committee member voted for a quarter-point hike last month.