This week has seen some rather alarmist reports predicting the imminent collapse of the housing market, as prices soar above earnings and buyers borrow up to the hilt to buy their new homes. We take a look at some of the fears of the economists, the reaction from within the property industry and examine some of the factors which could contribute to additional problems should the housing market stumble.

Cambridge Econometrics is one of Britain's premier think tanks and when they talk, influential policy makers usually sit up and listen. So when they announced this week that they believed the housing market could well be due for a major correction, it is understandable that the shock waves could be felt all the way up and down the country.

The statement from Cambridge Econometrics director Saxon Brettell was pretty resounding and left little room for manoeuvre: "I feel we are at the top of the market. The only way we can go is down. The transformation to a feel-bad economy could mean a sharp correction in the South's housing market. The situation is worrying."

It certainly could be worrying if you are a homeowner. One of the main problems that CE believe is getting out of hand is the rate at which property prices are outgrowing earnings, particularly in the South East. These ratios are regarded by housing economists as an important benchmark, allowing them to measure whether the market has moved out of line with the underlying economy.

The historical average has been a ratio of 3.3 - in other words average house prices of 3.3 times average earnings. But the ratio in London is a whopping 4.8, well above what these economists believe can reasonably be sustained. They argue that prices would need to fall by 21 percent or £31,000 to correct the imbalance - something that most people would reasonably class as a collapse. The rest of the South East is in a fairly similar position with house prices four times higher than annual incomes, requiring a drop of £11,000 to return to the usual level.

Other hotspots are also overheating, according to the report. East Anglia has average house prices of £86,797 which equates to a ratio of around 3.5 and would require average prices to fall by £4,800 to correct the imbalance.

However, by the same token, some areas in the country are in fact undervalued. In the most extreme case, Yorkshire and Humberside, average prices would have to rise by almost £17,000 to return to the historical average price to income ratio of 3.3. And yet this is the report on which the doomsday merchants are basing their predictions.

Understandably, industry leaders were quick to reassure the public that the housing market is in good shape and that people should have no qualms about entering the market at this time.

Both the Halifax and the Nationwide Building Society rejected the report and said they expected house prices in London would continue to rise this year. The Council of Mortgage Lenders also disagreed with the findings and various housebuilders were equally belligerent in their dismissal of the findings.

Among the reasons given for the continued belief in the market were:

The level of interest rates, which are currently at a 35-year low, meaning both that mortgage repayments are lower and other debt is easier to manage.

High disposable incomes mean that according o some statistics, the average home buyer now spends 24% of his or her net income on mortgage payments, compared to 41% in 1990.

Confidence was stable at the moment, with demand for new houses was as strong as ever.

Whether or not the market is headed for a collapse, it is clear that some lenders have begun to slowly return to the dangerous practice of allowing home buyers to borrow more than they can really afford.

Falling interest rates mean that buyers believe that they can afford to take out larger loans, as in the short term, repayments will be lower.

The Financial Services Authority, has been warning for some time that over-generous mortgage lending by banks and building societies could lead to a high number of arrears cases and repossessions should there be any major economic downturn.

Following the crash of the late 1980's lenders became extremely cautious, requiring large deposits and rarely offering loans of more than three times an individual's salary, in order to protect against negative equity in the event of a downturn in the market. But in a bid to win customers, banks and building societies are once again lending up to five times salaries for loans of anything up to 97 percent of a property's value.

The increasing financial burden of such large loans is giving rise to a phenomenon being termed as "debt stress". A recent study among 10,000 borrowers by the Consumer Credit Counselling Service found the biggest concentration of those seeking help in debt problems was among homeowners aged 25 to 39. Some home buyers, particularly those with low incomes find themselves with escalating debts that can sometimes get as high as 50 times their income. This is a situation that could easily lead to bankruptcy, an ending that would be almost inescapable if the market collapsed.

The problem is particularly bad amongst couples who take out large mortgages based on a joint salary, only to find that they are later dependant on just one income. Unemployment and pregnancy are common causes of debt related problems, with people in Scotland, the North West, the West Midlands and the South West most likely to be "debt stressed".

It is possible that the bottom could fall out of the market. This is a risk that will never go away. But just how likely is it?

Well, we don't believe that the risk is that great. It is more likely that any correction in the market will take place gradually, as prices in London and the South East ease back towards those in the rest of the country. The ratios may also move further towards their historical average by a rise in earnings contributing to increased affordability.

Meanwhile, other studies have shown that demand for housing in the South East is likely to be underpinned by population shift and smaller family units well into this century, so we believe that homeowners should not panic and sell up just yet.

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