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The beginning of the credit crunch, just a month after the final base rate hike, marked the turning point. Competition among mortgage lenders evaporated as they turned to protecting their margins or struggled for funding.

Although they have cut down on other spending, home owners are generally not struggling to meet extra repayment costs as mortgage rates have started to rise, but confidence – the key in any economy – is on the wane.

Borrowers prepared for extra mortgage costs in 2008

Interest rates have already begun to fall, and are likely to be at 5.25 per cent by the middle of the year, possibly down to 5.0 per cent by the end of 2008. How far they fall will depend on the extent to which the money markets begin to function again and on how reluctant lenders are to pass on the full extent of the cuts. If lenders keep borrowing rates high, or the markets remain troublesome, the Bank of England will have to cut base rates further in order to have an effect on the end-borrower.

The 1m mortgage borrowers coming to the end of their fixed rate in the next twelve months, who will face the highest jump in monthly interest repayments, are already preparing. 8 per cent have already begun reducing their spending to ensure they can accommodate the extra monthly repayments, and others have financial plans in place to ensure they won’t struggle.

Cooler housing market to see lower transactions

The housing market will face a quieter 2008, particularly in the first half of the year. But unemployment is low and there is little evidence of forced sales. A period of stalemate between buyers and sellers is the most likely outcome. Prices will slow to a crawl and transaction numbers are likely to be lower. The normal Christmas slowdown certainly came early this year, but the whole market has been disrupted by the roll out of HIPs to all properties from December 14th. It will take the market some time to adjust.

Most importantly, falling rates will spur confidence in the market and lead to a stronger second half, both for prices and volumes. Due to years of low house building, particularly in the so called 'middle market', there continues to be a lack of homes in the UK and this will stop prices from falling significantly. propertyfinder.com research shows that there is an annual shortage of 350,000 family homes on the market and that one quarter of buyers are forced to buy a smaller home than they are looking for. People want and need far more family homes than exist, and as a result, three and four bedroom homes will retain their value best. We expect average house price growth of 0 – 1 per cent during 2008.

Areas of weakness

There are two extremities of the market that may prove more vulnerable in a slowdown.

Firstly, commodity new builds. Small properties without character are in oversupply and unattractive in an environment where high capital gains on a property are not a certainty.

At the opposite end of the market, premium London properties, reliant on demand from foreigners and the City, may lose value if bonuses are low this year and if the massive capital gains of prior years no longer look like a sure bet.

Warren Bright, chief executive of propertyfinder.com said "For some time, the UK has had a two speed housing market – with London and the South powering ahead in terms of growth rates. The financial market affluence which has largely spurred this growth is now in question and one of the main changes we expect in 2008 is the North-South gap in house price growth to narrow. Household finances are holding up well and a fundamental lack of UK housing supply will buoy prices over the long term. But market uncertainty and flawed HIP legislation have resulted in fewer buyers and sellers, so house prices are moderating. The MPC should act again sooner rather than later to bolster confidence and ensure the second half of 2008 is more positive."