Markets seldom disappoint both bulls and bears for long. But over the coming years the US housing market looks likely to do just that, according to a study by Harvard University.

After the slump of the early 1990s and the surge of the past five years, the housing market might prove an anti-climax to all concerned. The long period of stagnation forecast by the survey would disappoint home-owners who expect big price rises but also those who missed the boat and have been hoping for a crash.

“Although housing prices are stretched, it is hard to see the catalyst for a crisis in the market,” says Nicolas Retsinas, director of the Joint Center for Housing Studies at Harvard. “The overvaluation looks pretty well balanced by longer term supports for house prices, so we may just see a few years with little action. Houses will revert to being something to live in rather than money makers.”

The study begins with some sobering observations about the record run in the US housing market. Over the past five years house prices have outstripped income growth more than sixfold – the median home now costs more than four times median household income in 49 out of 145 metropolitan areas in the US, a record. In 14 metropolitan areas, the median house is now worth more than six times median income. Last year saw the average house price shoot up 9.4 per cent – the biggest rise in the average house price since records started more than 40 years ago.

Financial strains on US home-owners have been mounting. The number of Americans devoting more than half of their incomes to housing climbed by 1.9m to 15.6m in the three years to 2004.

To bridge the gap between sluggish earnings growth and speedy house price growth, ever more Americans have been tempted by riskier flexible-rate mortgage products. More than a third of loans last year were at adjustable rates and may rebound on their holders if interest rates continue to climb. Even more reckless buyers, about 10 per cent last year, opted for payment-option mortgages – which do not require full payment of the interest costs.

So why will non-home-owners be deprived of the crash they have been waiting for?

The strongest underlying support for the market comes from accelerating household formation. Demand is being driven not only by population growth but by household fragmentation, as couples divorce or children leave home.

Immigration has been a still stronger force – over the past decade 12.6m new households were formed in the US. Over the next 10 years the pace of household formation will accelerate to 14.6m, according to the Joint Center for Housing Studies.

“Even if America decided to close the borders now, we would still see the lagged effects of previous waves of immigration,” said Mr Retsinas. “Many of those that came to America earlier are only now in a position to buy property. As it is, we don’t believe there will be any slowdown in immigration.”

The Harvard study also argues that there are fewer points of vulnerability than during previous housing market downturns. The macroeconomic outlook for the US is uncertain but no mainstream economists are predicting the kind of surge in unemployment or leap in interest rates that would prick the housing bubble. In spite of the shift towards flexible rate mortgages, 75 per cent of mortgage holders have 30-year fixed rate loans and are therefore largely invulnerable to rising rates. A third of households own their homes outright.

Nor are manylikely to suffer from negative equity should rising interest rates or unemployment drive up defaults – about 94 per cent of home-owners have equity of more than 10 per cent.

Over-development has also been less of a problem than in the past, the study says. Price declines associated with episodes of big job losses alone average 4.5 per cent, while those occurring around periods of over-building alone average 8.3 per cent, it says.

Not everyone concurs, however. Many economists say national figures are deceptive, since they obscure pockets of extreme over-valuation in property prices and greater vulnerability to rising rates. Others point to evidence of overbuilding in recent years. Residential investment has risen to 6 per cent of gross domestic product – its highest level in 50 years and much higher than the average of 4.75 per cent.

The Harvard study concedes that even a slowing housing market could take a heavy toll on growth, as Americans become less able to use their houses as ATM machines and less employment is created by homebuilding. Provided the slowdown is gradual, as Harvard expects, this could help rebalance the US economy, reducing demand for imports and so stemming the growth of the trade deficit.

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