In polite circles there is one C-word that remains taboo. Crash. We can whisper it or think it, but anyone saying it aloud faces ostracism from our property-obsessed culture.

We may have to overcome our objections. House price inflation is cooling in England and Wales – but still rising in Scotland and Northern Ireland, although for how long? – and the assumption that property prices can only ever move in one direction may need to be revised.

In April mortgage levels fell to their lowest for a year. It could mark the start of a prolonged cooling-off. Nationwide, Britain’s largest building society, says that house price growth across the country is set to slow further in 2008 to just under 5 per cent. Fionnuala Earley, its chief economist, pointed out that the three-month rate of house price inflation was running at 3.5 per cent in January. By May, that rate had more than halved.

The average price of a home is now about 10.3 per cent more than a year ago, but the underlying picture leads economists to predict that annual inflation will have fallen to between 5 per cent and 8 per cent by December. Price inflation in the North of England has already slowed to 5.3 per cent during the first half of this year.

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• Nationwide says slowdown may limit price rise

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Housing costs taking their toll

The question that always accompanies fresh data showing a fast-growing housing market is: are we headed for a crash?

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True, in London and a handful of its satellite cities and towns prices are still roaring ahead. Estate agents believe that they will carry on rising in 2008 at a multiple of the increase in average earnings, possibly by as much as 10 per cent. Cash-rich buyers in the South are less influenced than their northern brethren by the recent rises in interest rates. These buyers are chasing a limited stock of housing, forcing up prices. Savills, the property agent, records inflation of up to 40 per cent for sales of multi-million-pound homes in parts of Chelsea and Belgravia in just the first five months of this year.

Yet beyond the enclaves of West London, the picture is less rosy. But will the predicted cooling become a crash? A few key assumptions will come into play.

The first is confidence. The housing market relies on confidence like any other. First-time buyers in Bolton need to be confident that their astronomical mortgage is worth it, just as Belgravia depends on confidence that London will continue to be a magnet for international money. If interest rates rise much above 6 per cent, experts believe that much of this confidence could evaporate.

During the last housing crash, of 1989-94, interest rates spiralled to more than 15 per cent. Yet the price of an average home in Britain today is three times the cost of one 15 years ago. That means that it takes a much smaller rise in interest rates for home-owners to find themselves in difficulties maintaining the bigger borrowings needed today.

Yolande Barnes, head of residential research at Savills, said: “We are in uncharted territory. A lot of the market is based on the willingness to sink large amounts of wealth into housing. It is confidence-based. That tends to make it more volatile. There is even a problem if interest rates get to 6.5 per cent. That is the absolute biting point. That would probably trigger a household debt crisis similar to the late 1980s.

“We think at that point all the household spending surplus disappears, once you have paid housing costs and the basic cost of living. A widespread crash is, however, unlikely. It would take extreme circumstances and the broad economic environment is benign.”

There is a third assumption, which cannot be tested by looking back to the last housing crash. Buy-to-let investors are relatively new in the market. Figures from the Council of Mortgage Lenders show that buy-to-let mortgages totalled £38.4 billion last year, representing 11 per cent of mortgage advances made during the year. Two years ago some analysts predicted a wave of forced sellers among buy-to-let investors that they said could send house prices crashing 40 per cent. That fear never became reality.

Property pundits will hope that these new real estate owners remain long-term investors as interest rates start to rise.