The boom generation wakes up to reality

For a new generation of homeowners, house prices have only ever gone in one direction: up. Many have spent the past decade watching as the value of their home has soared; according to Halifax, the average property in the UK today costs [pound]196,535, nearly three times as much as in 1997.

Most people who have bought their first home since then are sitting on valuable equity and can be easily forgiven for believing that, as an investment, property is little short of a dead cert.

A housing boom - the result of low interest rates, a buoyant economy and high employment - has given many homeowners new wealth that has in turn led to further investment in property.

With wannabe property speculators eager to take out buy-to-let loans, the UK housing market has grown dramatically. Price rises in some parts of London topped 20 per cent last year.

But some of these bricks and mortar investors may recently have begun to feel the winds of change. Three weeks ago, the Halifax quarterly house price index showed actual falls in average property prices during May, June and July this year in three parts of the UK. In the West Midlands, the South-west and Wales, property depreciated by 1.1 per cent, 0.4 per cent and 2.8 per cent respectively.

Martin Ellis, chief economist at the Halifax, called these dips "indicative of a general cooling of the housing market", following on from five quarter-point rises in interest rates in the past year. The last time negative movements in property prices were recorded by the bank was, he added, in the first quarter of 2005 (this too was a result of a spate of rate rises the previous year - from 3.75 per cent to 4.75 per cent).

Others in the property sector are predicting further price falls elsewhere. They believe the "rate rise medicine" administered by the Monetary Policy Committee (MPC) of the Bank of England, led by its Governor, Mervyn King, has not yet had the full effect of putting up borrowing costs sufficiently to curb inflation in the housing market and the wider economy.

Many millions of homeowners have yet to feel the sting of rising interest rates, being sheltered by fixed-rate mortgages. More than 50 per cent of home loans are currently on a fixed rate, according to the Council of Mortgage Lenders. But between 75 and 80 per cent of these cheap deals are fixed for two years only.

Over the next 18 months, the CML estimates that more than two million borrowers will be coming off this type of mortgage - and straight into a much less borrowing-friendly interest rate environment.

According to Halifax, a borrower with a [pound]114,000 mortgage who took out a two-year fix in 2005 at 5.08 per cent faces an increase in monthly payments of around [pound]65 (or 10 per cent) if they take out another two-year fix when their deal expires this year.

"Many people coming off fixed rates will struggle with the new costs even with the current base rate of 5.75 per cent, and if this goes up to 6 per cent they will struggle further still," says Ray Boulger at mortgage broker John Charcol.

"So it stands to reason that, if homeowners were considering trading up, they may now have second thoughts."

Some go further, claiming that the "marginal price falls" seen in pockets of the country are the start of a wider downward spiral.

"It takes a year for one interest rate rise to have an effect on the property market so all we are seeing now is the effect of the rise in August last year," says Jonathan Davis of financial advice company Armstrong Davis. "After that, homeowners will have subsequent rises in November, January, May and July to contend with. I predict that the effect of this will be house price falls of around 25 per cent in the next four to six years."

Mr Davis also estimates that 2007 will be the "last bastion" of the buy-to-let landlord. "There is now more buy-to-let property up for sale than there has been for two years, and many more landlords are waiting for their tenants' leases to come to an end before selling," he adds.

"People are no longer buying [as much] investment property, which means there is no bottom to the market, as first-timers were priced out years ago. And when there is no bottom to a market, house prices fall."

However, the majority of specialists remain positive about the prospects for the housing market, dismissing the doom-mongering from websites such as housepricecrash.co.uk.

"The housing market is well underpinned as employment levels are good," says Mr Ellis of the Halifax.

"For the vast majority of homeowners, interest rate rises are not causing any [serious] pain and base rate should now be nearing or at the top of the interest-rate cycle."

Mr Boulger agrees, adding that the minutes of last month's Bank of England MPC meeting, which showed only six of the nine members voting to raise rates, was an indication that the Bank considers rates will not need to go much higher.

Estate agents in the "affected regions" are not ruffled either. Chris Wood, vice-president of the National Association of Estate Agents, is also the director of PDQ Estates based in west Cornwall, a region where prices have dipped by 0.4 per cent, according to Halifax.