How to tell if you're spending too much on property

House prices are at record highs - but with global interest rates rising, the gains seem unlikely to continue. So how can you protect yourself from a house price crash if you're planning to buy now?

House prices are continuing to pick up but is the mini-revival already wearing thin as summer approaches?

According to property website Hometrack, house prices rose by 0.6% in April. Gains were driven mainly once again by growth in London prices. But growth elsewhere in the country has been limited. Hometrack's Richard Donnell said affordability pressures mean the group expects 'levels of market activity and growth to slow in the run up to the summer and the World Cup.'

And the prospects for further gains this year look poor. A growing number of experts are starting to believe that the next move in UK interest rates is more likely to be up than down.

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So what should you do if you're still thinking of buying a house?

Let's get one thing clear we believe and have already argued on several occasions that buying UK property as an investment right now is a huge mistake.

Rental yields are no better than you can get in a decent savings account (without all the risks), while weak annual house price growth means capital gains are unlikely to match inflation. For more on this topic, click here: What's propping up house prices?

But of course, people don't just buy property as an investment they also buy property to live in. And it's all very well saying that now may not be the best time to buy, but it can be hard to argue with a spouse who wants the freedom to decorate the spare room without having to ask the landlord for permission.

So if you are planning to buy a house regardless, how can you avoid making a disastrous mistake?

The Sunday Times provides a good example of what not to do. It recounts the tale of a 20-something first time buyer. The woman in question is saddled with student debt and an overdraft, but has still taken the decision to buy a property.

"It is hard enough buying now because property is so expensive, but if I waited until my debts were all cleared it would be even worse because prices would have risen further," she says.

So how can this debt-laden first time buyer afford to make her first step onto the property ladder? Simple, of course her parents are coughing up the deposit.

And what about covering the mortgage payments? Well, she's planning to rent out a room. "Providing I don't have any problems finding a lodger, it shouldn't cost me any more each monththan the rent I'm paying at the moment."

There are a few simple points about affordability that can be picked out of this story. Firstly, if you have to rely on your parents to help you buy a house, that means you can't afford it. Secondly, if you also have to rely on getting a lodger so that you can make the monthly repayments, that means you really can't afford it.

The reason that buyers like this (and their parents) are willing to overstretch themselves so dramatically is that they are scared they will be left stranded by further price increases.

But when people are buying into an investment because they are afraid that they'll miss the bus if they don't, that's usually a sure sign that the market has reached its peak. And under those conditions, it's more important than ever to make sure that you have plenty of room to breathe in case house prices fall, or your mortgage payments rise.

Because although many people seem to have forgotten it, house prices actually go down as well as up. And there are strong reasons to believe that house prices will resume their downward trend later this year.

Interest rates around the world are rising last week China surprised analysts by hiking its key interest rate to 5.85% from 5.58%. And the UK is not exempt from this trend.

At the start of the year, most commentators were still expecting UK interest rates to fall further. But the mood is changing rapidly. The National Institute of Economic and Social Research last week urged the bank to raise rates pre-emptively to offset inflationary pressures.

Meanwhile, Ben Broadbent, Goldman Sachs' UK economist told the Independent: "We continue to think the next move in rates will be up and would not discount the chances of a minority vote for a hike or at least the case for one appearing in the MPC minutes over the next three months."

It's little wonder that the mood has changed. Oil prices which many had expected to fall this year, contributing to lower inflation have already burst through the highs set last year when Hurricane Katrina hit. That in turn means higher costs for households, at a time when unemployment is rising and bankruptcies are already at record high levels.

Subscribers can read MoneyWeek economist James Ferguson's latest take on the property market and his advice for homebuyers - by clicking here: Where is the housing crash?

And if you're not yet a subscriber, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.

Turning to the stock markets

On Friday, the FTSE 100 shed 36 points to 6,023. Yellow Pages publisher Yell Group was among the main fallers, down 3% to 514p, as it agreed to buy Spanish directory group TPI. For a full market report, see: London market close

On Monday, UK and continental European markets were closed for a holiday. Across the Atlantic, US stocks fell back. Investors were unnerved by reports that Federal Reserve chairman Ben Bernanke felt that markets were being over-optimistic in thinking that interest rate hikes will pause soon. The Dow Jones fell 23 to 11,343, while the S&P 500 slipped 5 to 1,305. The tech-heavy Nasdaq shed 17 to 2,304.

In Asian stock markets, the Nikkei 225 gained 228 points to 17,153. Carmakers were the main risers on expectations that dividends are set to increase.

This morning, oil continued to edge higher in New York, trading at around $73.80 a barrel. Brent crude was sharply higher, trading at around $74.25.

Meanwhile, spot gold retreated to around $656 an ounce, after hitting a fresh 25-year high of $661.10 on Monday. Silver was trading at around $13.76 an ounce.

And here in the UK, Tim Waterstone has dropped plans to buy the Waterstones bookshop chain from HMV Group.

And our two recommended articles for today...

Why remortgaging could cost more than you think

- Remortgaging to pay off your credit card debts can seem to make sense, says MoneyWeek editor Merryn Somerset Webb. But the apparently lower rates offered by mortgage lenders disguise many pitfalls. To find out why using your mortgage to pay for that flat screen TV could end up costing you thousands of pounds more than you expected, click here: Why remortgaging could cost more than you think

How debt could sink the US economy

- Many experts say we shouldn't be concerned about rising levels of US government debt - but they're wrong, says gold commentator Paul van Eeden. To find out why higher US interest rates and a falling dollar will be an inevitable consequence of soaring government spending, click here: How debt could sink the US economy

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.