BofA says 1-in-5 chance of UK house crash

File photos shows a housing estate in Burnley. There is a one in five chance Britain's housing market will crash in the next two years, according to new research by a leading bank on Friday. There is a one in five chance Britain's housing market will crash in the next two years, according to new research by a leading bank on Friday.

LONDON (Reuters) - There is a one in five chance Britain's housing market will crash in the next two years, according to new research by a leading bank on Friday.

Bank of America reckons house prices are 20 percent overvalued and there are now signs that the market is peaking.

"Leading indicators and our own econometric work point to a significant slowdown in the UK housing market later on this year and into next," said Matthew Sharratt, an economist at the investment bank.

"We put the probability of a crash sometime during 2008/09 at around 20 percent."

The bank's central view is that house price inflation will remain very subdued until 2010

For now, leading surveys like the Halifax and Nationwide are reporting prices rising at double-digit rates as buyers bemoan lack of supply.

But a number of warnings signs are beginning to flash red. This week, the Royal Institution of Chartered Surveyors said prices in June rose at their weakest rate since the start of 2006 as it called time on the boom in the south east.

"Interest rates hikes have begun to affect the psychology of the market with potential new buyers starting to think twice," said RICS spokesman Ian Perry.

Barratt Developments said on Wednesday it expected higher rates to hamper activity while Bovis Homes on Monday reported a sharp slowdown in reservations.

The Bank of England has now raised rates five times since last August to a six year high of 5.75 percent and its governor keeps urging homebuyers to think about what they can afford as lenders have been prepared to loan ever greater sums of money.

WORRIED DARLING

New British finance minister Alistair Darling is certainly worried about what might happen when millions of homeowners who took out two-year fixed rate loans back in August 2005 when mortgage rates were pegged at 4.5 percent suddenly face significantly higher repayments later this year.

"What you don't want are people to have found that their outgoings have gone up quite dramatically," he said last week.

Affordability is also an issue. With property prices trebling in a decade, many homebuyers have been forced to borrow five to six times their salary, instead of the usual three.

According to the Council of Mortgage Lenders, first-time buyers accounted for roughly 35 percent of mortgages in the first quarter of 2007, well below the historical average of 50 percent since 1980.

While the buy-to-let market has so far plugged the gap, higher financing costs are already beginning to deter many investors.

Another recent survey by RICS showed more than 5 percent of landlords chose to sell their properties when tenants' leases expired in April.

"The worry remains that, with the ratio of house prices to rents currently some 60 percent above its long-term average according to our calculations, the current rise in interest rates could bring increasing pressure on buy-to-let investors," said Sharratt.

"At the margin, such investors could be forced to sell, providing a trigger for a broader slowdown in the housing market."