Double whammy could send house prices plunging

The cost of buying a home has outpaced wage rises to such a degree that a price fall - or correction - is now said to be inevitable.

The Bank of England has increased interest rates, which are currently 5.25 per cent, three times since August.

There are fears it will add another quarter point to the base rate as early as Thursday, hitting homeowners further.

Industry leaders also believe that when HIPs - effectively a logbook for the home - come into effect from June 1, the market could flounder.

They fear some homeowners will rush to sell before the £600 packs come into force, but that after then others will be reluctant to incur the cost of putting their properties up for sale - leading to a shortage of available homes.

In January last year, the Council of Mortgage Lenders said it expected the introduction of the packs to lead to wild swings in the property market. Yet homeowners may well treat the latest warnings, which come from the most recent Housing Affordability Index compiled by Lombard and the Daily Telegraph, with caution.

Experts have been confidently predicting house price falls of 20-30per cent every year since 2002.

These analysts have used the same rationale to explain the likelihood of a downturn in the market, specifically that prices have raced way ahead of wage rises and what buyers can afford.

Nevertheless, prices have continued to rise, largely driven by a property shortage and because

Borrowers have been able to take on mega-mortgages to fund their purchases.

According to the index, affordability - a measure that compares house prices and mortgage costs with incomes - has plunged by seven per cent over the past 12 months.

The barometer, in which 100 points represents the average comparative cost of house prices relative to income since the early 1960s, has now fallen to 91.2 points. It is the lowest level of affordability since 1991.

Diana Choyleva of Lombard Street Research said: "We are now clearly at the end of the house price boom. We think there will be a correction next year, although it is unlikely to be as severe as the last crash."

She believes that rising interest rates are the decisive factor in killing the property boom.

Miss Choyleva said: "The Bank of England may have little choice but to raise interest rates further. 2008 could be a difficult year for the UK housing market."

The monthly increase in house prices was only 0.4 per cent in March. In the same month last year it was 1.2 per cent.

On average, prices are increasing by £41 a day - far below the rise of up to £100 a day in the recent past.

The average price is now £177,083. The average mortgage is around £150,000.