The Royal Institution of Chartered Surveyors (RICS) economic forecast for December 04/January 05 shows that although house price inflation has slowed sharply there is no notable distress in the household sector, and buy-to-let landlords show few signs of panicking.

Financial returns for property investors are outperforming other major asset classes again with institutional investors steaming in and private investors continuing to pour money into the market.

While residential property is on a weak footing, the commercial property and construction markets are looking forward to a bumper 2005, says RICS.

A steady picture of rising activity continues in the construction industry with commercial building activity the main source of growth in 2004 following a drop in output in 2003.

House building in both public and private sectors is still firm but the housing market slowdown may weaken activity going forward. Slowing public works activity has been evident for some time but the government is expecting a huge uplift in 2005 following a large underspend in 2004.

RICS says the Bank of England has cast doubts upon the strength of the link between the housing market and consumer spending. If consumers were using borrowing to fund current spending (ie cars, holidays etc) then this would have been clearly evident in declines in the savings ratio.

In fact the savings ratio has been little changed for four years. Much of debt run-up by households has been either saved in financial assets or put into real estate.

By highlighting a possible breakdown in the relationship between spending and the housing market, the Bank of England may be indicating that it is not prepared to cut interest rates in response to a housing market slowdown (for fear that a new boom may be ignited) unless it is accompanied by a downturn in real economic activity and consumer spending.