Uphill struggle as rates rise

Alex and Nickie Aiken are worried homeowners.

With a three-bedroom flat worth almost ?500,000 in Pimlico, south London, and their first child due in May they were
anticipating a happy year. But after two interest rate rises in the past four months they are faced with cancelling a
holiday and fear worse to come as they struggle to meet increased mortgage payments.

'This is our biggest worry apart from the baby. We have a ?320,000 mortgage and if predictions of more rises are correct
they'll cost us at least ?1,000 this year. So the holiday has gone,' says Alex, who works for Westminster City Council in
central London. 'If the base rate rises to 5.5 or 6 per cent, Nickie will have to return to work full time instead of part time
after the birth. But that will add to our child-minding costs, so it's a major headache for us.'

The Aikens are not unusual. Tania Nott and her boyfriend Stuart Pearson borrowed ?257,000 to buy a two-bedroom
garden flat in Kew, west London, last November, just as the base rate increased for the first time since February 2000.

Tania, publicity manager for a television company, says: 'We're not panicking yet but we've tried to take pre-emptive
action. We've moved from a tracker mortgage that was 1 per cent above base rate to a fixed rate of just 4.39 per cent until
November 2005. It's a sensible precaution and we just hope it will see us through.'

Interest rates are not the only statistics worrying property market observers.

Much of Wales and northern England saw 25 per cent prices rises in 2003 and house price inflation across the UK is still
running at 16 per cent, according to the Halifax. Meanwhile, for the first time, the average home in Greater London now
costs over ?260,000.

Figures released recently by the National Association of Estate Agents showed that first time-buyers made up only 16
per cent of purchasers so far this year - well down from the five-year trend of 25 per cent. The average price now paid by
a first-timer is over ?100,000, whereas just a year ago it would have been less than ?83,000.

Now the creeping worries being shown by young owner-occupiers with large mortgages is the latest twist in the 'will it
or won't it crash?' saga as Britain's housing market cools down after three years of large increases in most areas.

Pessimistic analysts such as those at Capital Economics - a business consultancy run by Roger Bootle, who was a
member of the Treasury's panel of independent economic forecasters during the last Tory government - have long
predicted a gradual slowdown this year, with dramatic price drops from 2005 onwards.

'We stand by our forecast of a 20 per cent peak-to-trough fall' says Ed Stansfield, residential economist at the
consultancy. He argues that current home prices are signif icantly over-valued, especially in southern England.

'The correction will start with mainstream price falls of as much as 3 per cent by the fourth quarter of 2004,' he says. 'It
will probably take until mid-2007 before we see the full depth of the fall and over-valued properties return to their correct
values.'

He goes on: 'Obviously those who are also involved in selling houses may be reluctant to admit this scale of slowdown.

But even some of the most optimistic mainstream predictions talk of only a 4 per cent rise in the coming 12 months, and
to achieve that there have to be some months where there will be absolute price falls.'

He and fellow pessimists are bolstered in their views by comments from the Council of Mortgage Lenders, which last
month warned that the 2003 total of 7,200 home repossessions would rise to 8,500 in 2004 and then mushroom to 11,000
in 2005.

'Borrowers should allow in their finances for higher debt servicing as the year progresses, and people with high levels
of unsecured credit as well as a mortgage should pay particular attention to their total increase in costs,' advises CML's
head of research, Bob Pannell.

By contrast, the industry optimists, predictably including most mortgage lenders and estate agents, say there will be a
slow soft landing for house prices. They argue that the high unemployment, low output and high inflation that formed
the backdrop to the early-1990s housing crash do not exist now.

'A strengthening economy should continue to support a strong labour market during 2004, underpinning healthy
housing demand' says Shane O'Riordain, an economist at the Halifax. He claims this year's rate rises will 'cause few
problems for the majority of homeowners' and says mortgage payments now account for just 13 per cent of gross
earnings.

If the base rate rose to 4.5 per cent, says O'Riordain, that proportion would rise to 15 per cent, well below the long-term
average of 21 per cent.

Some borrowers, especially those who are old enough to remember the 1990s' housing crash, agree with this optimistic
interpretation.

Sandra and Stan Glendenning owe just ?48,000 on their ?160,000 four-bedroom detached house in Peterborough. With
their two children having grown up and left home, they can afford to overpay their mortgage by ?50 each month.

'Even if rates rise to 5.5 per cent in the coming year, they wouldn't absorb all the extra we are paying, so we hope we
won't feel any pain,' says Sandra, a customer adviser at the Norwich and Peterborough building society. 'About 14 years
ago, when both our children were under five years old, the mortgage rates rose drastically [to 15.4 per cent]. Our
payments went up by over ?200 in just one month, even on the relatively small home loan we had at that time. Today's
position is much more relaxed - and so are we.'

The Glendennings are lucky. But one in every seven mortgage borrowers became a homeowner only after the era of low
interest rates dawned in 1999.
Until four months ago, these people knew only stable or falling interest rates, and borrowed large sums on the strength
of that cheap-money culture.

Will they be able to cope if the housing market's landing is harder than the optimists predict?