The Times is running regular briefings to coincide with Target Two Point Zero, the Bank of England competition for sixth-formers. The contest challenges students to play the role of the Bank’s Monetary Policy Committee (MPC) and recommend the best level for interest rates. This week: the housing market and its role.

The media is full of headlines about housing. What is happening? The protracted boom in Britain’s property market that began in the Nineties finally seems to be coming to an end. Over the past ten years, the national average price of a home has trebled – and over the past six years it has doubled to about £200,000.

In 2006, data from Nationwide, the building society, shows, prices rose by more than 9 per cent. So far this year, they have risen by 6 per cent. Yet there are growing signs that the upward march in the value of homes may be over. In recent weeks, there have been mounting indications that prices have begun to fall

What evidence is there that prices are declining? Don’t house price figures often conflict? The deluge of regular data can be confusing. As well as authoritative monthly surveys from Nationwide, and Halifax, the leading mortgage bank, and the Royal Institution of Chartered Surveyors (RICS), Hometrack and Rightmove, two property websites, produce their own estimates of prices, and monthly official figures come from the Land Registry and the Department for Communities and Local Government.

It is true that signals from these sources often diverge. That is partly because they gauge prices at different stages of the buying process. For example, Halifax and Nationwide track prices when mortgage cash is handed over, on average 18 weeks after buyers start searching, but Rightmove looks at asking prices. Certainty that the market is now in a downturn has now grown substantially, however, because all of the main sources have shown prices falling in the past two months.

What has caused the slide in the market? Economists point to a few main influences. First, homes now look very overvalued and many buyers are struggling to afford them. Measured against earnings, the average property now costs up to nine time the average Briton’s annual pay. Secondly, bigger mortgage bills due to higher interest rates, which have risen five times since last August, are stretching affordability, while many homeowners face the expiry of cheap, fixed-rate loans deals.

What might happen next? Will the market crash? Economists believe that house prices are set for a sustained slowdown, although most forecasts are for them still to rise a little, by perhaps 2 per cent next year. A pointer to further market weakness in the short-term is the falling number of approvals of mortgages still to be taken up, which dropped to just 88,000 in October, the lowest since February 2005.

Some analysts argue that the market could succumb to a more severe “correction”, with prices falling 10 per cent or more. Two factors could be important. Because of financial market turmoil, some banks are tightening loan conditions, making mortgages harder to get, and more costly. Whether the MPC soon cuts interest rates again may also be crucial. In 2005, the housing boom temporarily stalled after rate rises, with house price inflation slowing from double-digits to near-zero. But prices took off after the Bank eased rates a year later.

How do house prices affect inflation? House prices are not directly in the Bank’s target measure of inflation, the consumer prices index. However, rising prices can make homeowners feel more secure, boosting willingness to spend, while giving them collateral against which they can borrow. Greater spending power, and greater readiness to use it, can thus raise demand in the economy, putting upward pressure on inflation.

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