The meltdown that has rocked global stock markets over the past month has heightened fears of a sharp slowdown in the property market.

Analysts predict stagnation, even in London, and possibly price falls if the financial crisis spills over to the UK economy.

Even if it blows over, homeowners are warned that the highest interest rates for six years and affordability constraints could spell the end of the housing-market boom.

Liam Bailey at Knight Frank, an estate agent, said: “If the global financial crisis tail-spins and we get an economic downturn, the brakes will be put on the housing market nationwide.”

Background

• Elephant slumps in wake of crunch

• Heads on the block, investors call for change

• Credit crunch forces Delek to leave property deal

• US rate cut looks certain after new data

• Bank of America to axe 3,000 after 'our errors'

Background

• More pain for private equity industry

• Russian state bank poised to boost liquidity

• House prices‘to stay flat for years’

• Will soaring oil pump up inflation?

• US bank slump goes on

Black clouds loom on horizon

For the first time in 15 years, I am seriously worried about the outlook for the economy, the housing market and sterling

Float on the job market

Don't believe the scary headlines. It's not the worst time to consider a career in banking

Related Links

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Some semblance of calm was restored to global stock markets last week as hopes were raised of an imminent cut in American interest rates. The FTSE 100 index of leading shares finished the week up 3% at 6,220, reversing huge losses over the past month. However, most experts believe the financial crisis, sparked by a downturn in US house prices and a huge rise in mortgage defaults, is far from over.

Analysts are concerned that continued volatility in the stock markets over the next few months could hit consumer confidence, raise fears of job cuts and reduce bonuses in the City, possibly by between 10% and 20%, significantly cutting the amount of cash workers have to plough into property.

The strength of the housing market has surprised many experts this year. Rightmove, a property website, said last week that prices are on average a healthy 12.8% higher than a year ago. The housing market in London and the southeast has seen particularly strong growth. Knight Frank reports that the value of prime London properties – those valued at more than £1m – is up by 36%.

However, Fionnuala Earley, Nationwide’s chief economist, warns that longer-term turmoil on the money markets could send mortgage rates higher, denting housebuyer confidence. She thinks growth will head back to 6% by the end of the year as the financial crisis hits home.

She said: “If the situation persists, lenders who are dependent on wholesale markets for funding and those with the riskiest books will be forced to pass on higher costs, making it harder for people to get loans. We expect house-price inflation to be no higher than wage inflation next year, so we are talking about low, single digits.”

There are already signs of a slowdown in some areas as five interest-rate increases since last August begin to bite. House prices in the West Midlands fell 2.2% this month, according to Rightmove, while those in the north slipped 1%.

London also saw falls in some areas, with property prices in Tower Hamlets dropping by 7% and Camden down by 4% – the first monthly falls recorded in the capital for a year.

Many homeowners have so far been insulated from the rate rises because they have fixed-rate mortgages, but about 800,000 households are due to come to the end of their deals over the next three months and they face a sharp increase in repayments.

This time two years ago, the best fix was from Hinckley & Rugby building society at 4.19%. Anyone coming off that deal and wanting to fix for another two years will now have to pay 5.39%. Assuming a £200,000 interest-only loan, this will add £200 to the cost of their monthly payments.

Estate agents say that the number of people registering to buy a home took a tumble in July – often an early indicator of a house-price slowdown. The number of properties for sale fell by 33%.

Stewart Lilly, president of the National Association of Estate Agents, said: “The market hasn’t seen housing figures like this since 2004 when there was a notable slowdown.”

Few experts are predicting a full-blown crash, because a shortage of housing will help underpin values. However, analysts warn that some areas may be susceptible to short-term falls. The London boroughs that saw prices drop last month may slip back further. Other parts of the country at risk include the north and northwest of England, the Midlands and Northern Ireland.

Many anxious homeowners are hoping a downturn in prices will not last long. Kelly and Conor Breslin, pictured with their eight-month-old daughter Eleanor, are in the process of buying a four-bedroom house in Streatham Hill, southwest London.

Kelly, 31, an IT management consultant, said: “We have noticed a difference over the last couple of months, as asking prices seem to be getting more realistic.

“Even though we are slightly worried about buying at the top of the market we’re not buying to do somewhere up and sell it on for a profit. Even if the market does slow I don’t think we’ll lose money.”

Time to prepare for the worst?

AVERAGE house-price growth is expected to drop to the high single digits by the end of this year and fall to about 3% next year, its slowest growth rate since 1995. Experts warn some areas could see price falls. We answer the key questions.

There is already evidence that prices in some areas are falling. Asking prices in parts of the northwest, West Midlands, southwest and London have dipped this month, according to Rightmove, a property website, and further falls cannot be ruled out.

Fionnuala Earley, chief economist at Nationwide building society, said: “We probably will see some month-on-month falls and low single-digit growth next year.”

If you are thinking of buying, the temptation may therefore be to hold off for a few months, but analysts warn this may not be the best strategy.

Lucien Cook at Savills, an estate agency, said: “The danger of holding off is that buying opportunities may become more limited. Supply is already constrained in many parts of the country. If you find the right property and are happy with the price then I wouldn’t be put off from buying now.”

Any falls are only expected to be short term and annual growth is likely to remain in positive territory, albeit at a much lower level. The consensus is that prices will rise annually between 3% and 5% over the next five years.

I am a homeowner. Should I be worried?

If you are about to remortgage the turmoil could have a silver lining as the Bank of England is unlikely to want to push up interest rates when confidence has been so badly shaken.

Mortgage lenders have already started to introduce cheaper fixed deals in the belief rates have peaked and more are expected to follow.

Borrowers with variable-rate deals, though, could see payments go up if the crisis continues, even if a rate rise isn’t on the cards. Fixed rates are linked to swap rates, which reflect the City’s view on future interest-rate rises. Variable-rate deals are often funded by borrowing from other banks. Inter-bank rates have gone through the roof as a result of the financial crisis in America.

Ray Boulger at John Charcol, a broker, said: “If it looks as though inter-bank rates will stay high, lenders may have to increase the cost of their variable-rate mortgages.”

Is it a good time to be getting into buy-to-let?

Not if you want to make a quick buck. With house-price growth expected to slow, you should only consider buy-to-let as a long-term investment.

How has commercial property been affected?

UK commercial property returns for July were the lowest in 12 years at just 0.2%, according to Investment Property Databank. Property firm shares have also been hit.

The money market crisis has already resulted in some deals being pulled as it has driven up the cost of borrowing and made banks choosier about whom they lend to. There may be worse to come. CB Richard Ellis, a consultant, has told clients to expect the prices of offices, shops and factories to drop.

The popular Aberdeen Property Share fund is down 23% this year, according to figures from Morningstar, a data firm. New Star and Norwich Property have fallen 6.2% and 5.5% respectively.