Will the current house price boom continue? Raymond Perry looks at the evidence and the dangers for the legal profession if prices go into reverse

Has your house been earning more money than you in recent years? According to the latest figures from the Halifax house price index average, UK house prices have increased by more than 150% since the market bottomed out after the housing crash of the early 1990s.

Even though the ratio of average prices to average earnings has now exceeded the peak reached in 1989, prices are continuing to rise.

The Nationwide Building Society has now revised its forecast for house price inflation in 2004 from 9% to 15%.

Can this trend be sustained? Despite the apocalyptic predictions of some middle-market tabloids, the received wisdom is that there will be no property crash this time around.

But is this correct and what are their dangers for solicitors if there is a significant fall in prices?

Surging property values are certainly not unique to the UK.

Similar increases have occurred in many other western economies.

Even so, Britain has seen a spectacular growth in prices.

On some measures, property values are now 50% above their long-term average.

The main reason for the rise in prices has been the decline in interest rates and the arrival of what has seemed to be a permanently low inflation environment.

Homeowners have been prepared to take on substantially higher levels of borrowing than were possible in the past - it remains unclear whether borrowers as yet fully understand that the real burden of payments is shifted to the end of the mortgage period when inflation is low.

Investors have been also attracted to residential property because of poor returns from other investments, particularly equities.

Spencer Whitworth, investment and development director at FPD Savills, observes that large amounts of investment money have flowed into the UK residential sector simply on the basis of the conundrum: 'what else can I do with my money?'

Financial liberalisation and easy availability of credit may also be contributing to the boom.

The recent expos by the BBC's 'Money Programme' suggests that lenders are turning a blind eye to over-borrowing in the burgeoning self-certification sector of the mortgage market.

Other factors, including demographic changes and structural restrictions on the supply of new houses, are also playing a part in driving prices up.

But previous property booms in the UK have always been followed by periods of falling prices.

Will things be different this time? Many economists maintain that the increase in house prices is not a problem because higher values are justified by structural changes in the economy - particularly low inflation.

The absence of a trigger that might start a decline, such as higher interest rates or a large jump in unemployment, also makes many confident that there will be no repeat of 1989.

According to John Wriglesworth, housing economist for property research company Hometrack, 'speculation that there is going to be an imminent housing market crash has as much foundation as a brick on a pavlova'.

Others disagree, pointing to warning signs such as lack of affordability and a dramatic decline in net rental yields as confirmation that the market has become dangerously overvalued.

Property prices are not solely governed by economic factors.

Price increases are in part fuelled by an element of positive feedback - demand increases because prices are rising - which can work in reverse if prices start to fall.

Any reversal in prices - if it happens - would have a substantial impact on the British economy.

It might also have a more specific danger for the legal profession.

The last property slump produced a flood of claims against solicitors.

An odd side- effect of a rising market is that it conceals many claims.

Even when a conveyancer is negligent, the client may not suffer a loss because his property has increased in value.

But when prices fall, everything changes.

Matters that might have been ignored in more optimistic times are enough to make a property unmarketable.

Repossessions and forced sales mean any loss is crystalised.

Lenders who suffered losses in the 1990s were particularly assiduous in pursuing professionals, including lawyers, who had acted in the original transactions.

Indeed, specialist organisations exist that help lenders review files to locate such claims.

Lenders' solicitors were also remarkably inventive in framing equitable claims against conveyancers alleging breach of trust or fiduciary duty, when common law rules of causation and remoteness of damage limited the amount that they could otherwise recover.

Innovative financial products that seem attractive in a rising market might also land solicitors in difficulty if prices decline.

In the late 1980s and early 1990s, home income plans earned a bad reputation and were subsequently outlawed - although not before they had generated much litigation against solicitors.

Frank Maher, senior partner of Liverpool-based law firm Legal Risk, which advises professionals such as solicitors and estate agents on operational risk management issues, is concerned that the current popularity of equity release schemes may pose similar dangers.

According to Mr Maher, although these schemes are different from home income plans, there is still the potential for problems if there is a downturn in the housing market.

He notes that not all scheme providers are Safe Home Income Plan members and that many schemes have significant exit penalties.

'From the solicitors' point of view,' he says, 'there is significant risk of claims from disappointed beneficiaries, with whom the solicitor will have had little, if any, opportunity to manage the lines of communication.

Solicitors need to appreciate that these schemes require individual advice and attention to detail and cannot be handled as volume work on a commoditised basis.'

The future remains uncertain.

It is possible that the government's proposed introduction of real estate investment trusts next year, which it is hoped will encourage pension and insurance companies to invest more money in building new homes, may push prices even higher.

As John Kay, one of Britain's leading economists explains: 'Most economic systems are reflexive - what happens is influenced by how we perceive what will happen - we can never aspire to accurate forecasting of economic events.'

There may be no property crash this time, but solicitors should remember that there will always be unexpected shocks to the economy.

Believing the good times will last for ever might be costly.

Raymond Perry is a partner at Gloucester-based law firm Davies and Partners