House prices: 'Credit crunch biting deep for homeowners'

SOME might enjoy a brief moment of schadenfreude, but there is no comfort to be drawn from the fact that house price inflation in Edinburgh has fallen to its lowest level for 15 years. Homeowners will be dismayed that the average ten per cent annual increases they have enjoyed in recent times has come to a shuddering halt.

The credit crunch has smashed the lower rungs of the property ladder as the cost of borrowing rises and lenders continue to take fright about how much, and to whom, they lend.

With average house values predicted only to rise close to inflation this year in most parts of the city, and fall marginally in others, today's figures and predictions have removed any doubt that the market is cooling down, driven largely by the withdrawal of cheap mortgages, which have maintained property inflation.

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The Financial Services Authority estimates as many as one in three mortgages taken out in the past two years could be deemed risky. Encouraging people to overextend themselves has resulted in an increasing number of borrowers defaulting. The highest-profile offender, Northern Rock, saw its bad debts rise to 240 million last year from 81.2m in 2006.

This year could see a repeat of the great house price crash of 1991, when 75,540 homes in the UK were repossessed. Already the number of people forced to surrender their homes rose 20 per cent in 2007 to an eight-year high of 27,100.

But Northern Rock's collapse didn't take place until near the end of the year, and only in the past few weeks has the withdrawal of cheap mortgage products turned from a gradual process into a headlong rush.

HBoS, the country's largest lender, has slashed its product range and changed the criteria on which it lends. The roll-out of similar action by other lenders will result in far fewer people being accepted for loans and bargain mortgages offering 100 per cent or even more than the actual purchase price and terms beyond 25 years are already being consigned to history.

Edinburgh has traditionally been immune to the troughs of property slumps, but not this time. In line with national forecasts, relatively desirable inner-city areas such as Marchmont and Bruntsfield have actually experienced a reduction in values, while other parts will see prices rises barely keeping up with inflation until the markets settle.

As we reported yesterday, the cruel irony of fewer first-time buyers is soaring prices in the rented sector, so there is seemingly no escape from the effects of the downturn. Even housing associations will feel the pinch.

There will be pockets of the city like the Grange where earnings are such that the rising cost of borrowing will have little impact, but the vast majority of us will be hit with a long, chill blast of ill-wind.