From Leeds to Leicester and Nottingham to Ipswich they have sprung up. Block upon block of new apartments in the centre of town. The acres of timber flooring could surface a medium-sized county. Countless Smeg fridges, Brabantia rubbish bins and Gaggia espresso machines have been harnessed to give the show flats just the right tone. But if Alastair Stewart, a housebuilding analyst with Dresdner Kleinwort, is even half-right, the roof is caving in on this dreamy world of loft-style living. There just aren’t enough affluent young urbanites to buy or rent all this new space without big price falls. Ipswich, bluntly, is not Manhattan.

Moreover, the boom of the past few years has been fuelled not only by reckless bank lending but also by a “conspiracy of acquiescence” between developers and valuers at best and, in many cases, downright fraud. That is likely to make the ensuing bust all the more painful.

Mr Stewart has been bearish about the prospects for apartment valuations and for builders for some time, but now he is being heeded. His report yesterday thumped the shares of Persimmon, Taylor Wimpey, Bovis and others. Their values are less than a half of what they were a year ago and there could be further falls.

Most big builders are seriously exposed to the flats sector. Tough planning rules and the desire to cram ever more housing units on to a single plot have encouraged them to abandon their traditional habitat of edge-of-town greenfield housing estates in favour of city brownfield sites. Flats as a proportion of all housing starts have rocketed from 10 per cent to 15 per cent at the turn of the century to 49 per cent.

Builders, financiers and regulators are rapidly waking up to the problem. The Financial Services Authority revealed last week that it was investigating more than 200 cases of mortgage fraud centred on new-build city centre flats. Surveyors are suddenly being urged to dust down their profession rulebooks and err on the side of caution when valuing flats. Prices in some cities, notably Leeds, are plunging.

Barely a day goes by without another mortgage lender tightening the terms at which it lends. They are getting more selective and buy-to-let purchasers of city flats are their least favourite prospects.

Mr Stewart’s concern is over the damage to housebuilders. Sales volumes are falling and they are having to cut prices or introduce ever bigger incentives to shift newly built properties. Land market values are on the turn. This could prove devastating for housebuilder valuations because their share prices are underpinned by their land banks.

But there is a wider issue here. Souring sentiment in the flats market could deepen the malaise in the wider housing market. Some vulnerable people have been sucked into borrowing more than they can afford to buy flats. Valuers may have lied to buyers, buyers may have lied to lenders, builders may have lied to banks. If Nationwide Building Society is right and fraud is “endemic” in city-centre flats, there is going to be an embarrassing mess left on that immaculate flooring.

patrick.hosking@thetimes.co.uk

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