THE threat of higher borrowing costs is slowing house prices in more regions, with the gap further widening between the North and the South. Following a warning this week from Mervyn King, Governor of the Bank of England, that unless mortgage borrowers acted sensibly rates could climb from their current level of 5.5 per cent to 6 per cent by the end of the year, most pundits are predicting that the tone of the market will in most places remain subdued for the rest of 2007. Fewer buyers will wish to trade up in – staying put will be the new trend.

In a housing market debate held on Sunday at Grand Designs Live, organised by The Times, Ed Mead of Douglas & Gordon, Yolande Barnes of Savills and Jeremy Leaf of the Royal Institution of Chartered Surveyors (RICS) said that consumer confidence was essential in sustaining current property prices. But they added this was being eroded by the rapid increases in parts of the market, the high cost of moving home because of record stamp duty bills, the lack of choice in homes for sale across the market and the outdated planning system.

Data from Propertyfinder.com has confirmed that confidence among buyers is seeping away: the annual price growth expected by consumers is 4.97 per cent across the country – lower than the “high single-digit” growth predicted by such property watchers as Capital Economics. Expected growth is notably low in Wales and the South West, despite the relative strength in those regional markets that has persisted in recent months.

The supply of homes is of key importance to the health of the market; the shortage of properties for sale is driving up prices beyond the reach of many aspiring buyers. Barnes said: “The outlook for the market would be entirely different if people were supplied with the type of houses they wanted, where they wanted.”

Owners of flats, particularly in the North, can expect growth in the value of their property to be less than that of houses, which are in chronic short supply. Savills data, above, shows how the relative overbuilding of flats has helped to keep house prices high.

The current fragmented market – in which London prime property is outperforming the the rest of the country – is expected to be sustained for some time, according to projections from Savills, which believes the market in the North will underperform the South until 2016. The prime market will continue to be sustained, barring any economic shock, by international high-rollers and the undersupply of homes for sale. Barnes says: “The London hinterland now extends from Cornwall to the north Norfolk coast because of the second home effect.” Richard Donnell of Hometrack, however, says that parts of London that have been colonised by buyers priced out of their preferred location may be among those vulnerable to slowdown.

Areas within commuting distance of thriving cities will hold their value best; Barnes says that Nottingham, Leeds and Bradford are set to outperform the rest of the North.

What’s the market like near you? Hear the house price debate and give your view at: timesonline.co.uk/buyingandselling The South is set to outperform the North until 2016 and London will dominate for the next 6 to 18 months Yolande Barnes Director of Savills Research

"Outside London the impact of rising rates is more likely to be felt quickly" Ed Mead Director, Douglas and Gordon

"Confidence takes a long time to come but is very quick to disappear Jeremy Leaf RICS housing market spokesman Housing valuations look quite stretched, and that makes me worried. Buyers don’t seem to have factored a “normal” level of interest rates into their decisions. With interest rates now returning to more typical levels, evidence of stress is starting to emerge and the housing market looks vulnerable" Dominic White European economist, ABN Amro

"It is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial level" Mervyn King Governor, Bank of England

"The market is a little confused at the moment and almost in a holding pattern. Tremendous growth in prices and then interest rate increases in quick succession have led to a slowdown" Warren Bright Chief executive, Propertyfinder

"There is enough negative sentiment around to give potential investors pause for thought. Some buy-to-let landlords may be looking to cash in Ian Springett Chief executive, Primelocation Interest rates look set to reach 6 per cent and remain there next year, choking off new mortgage demand. If we were also to see a much weaker economy or even just a shock to confidence, house prices could begin to fall in the later stages of next year, especially outside London and the South East. But it seems likely that activity, not prices, will bear the brunt of any slowdown Ed Stansfield Property economist, Capital Economics The pace of price rises will slow in the second half of the year, with the annual increase well into single figures. Terraces and townhouses suitable for first-time buyers will hold up, compared with flats. Central London will remain strong due to foreign investments" Miles Shipside Commercial director, Rightmove

"We have real concerns about the sub £300,000 market outside London, which is already slowing significantly. We expect more and more people will begin to struggle with their mortgage payments, particularly as fixed-rate term mortgages come to an end" Max Ziff Chief executive, Humberts

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