Evidence has emerged that first-time buyers - the linchpin of a booming market - are being squeezed out with disastrous knock-on effects for existing home owners who are hoping to move.
Last week, both mortgage lenders and estate agents reported that the number of potential buyers was drying up. The change is most noticeable in London, where the rush started first. Latest figures from the Land Registry showed that the number of sales in the capital during the first quarter of this year was lower than in the last quarter of 1997 - and in some areas prices have fallen.
In recent months, the picture in the housing market has been complex, with prices still rising in the most popular neighbourhoods, and first- time buyers hit by a shortage of property. But six interest-rate rises since Labour came to power have finally started to take their toll on the market, with the Halifax bank reporting a slowing down of sales. The Nationwide building society, which also produces regular reports on the housing market, says that much of the activity in the market is due to people changing from one mortgage to another in search of the cheapest loan. And with cheap mortgage deals such as fixed-rate and discounted offers also under threat, cash-strapped young buyers are seriously worried about the cost of owning a home.
Last week Abbey National, Cheltenham & Gloucester and Alliance & Leicester responded to the latest base-rate rise by raising their standard mortgage rates by 0.25 per cent. This takes their variable rates to 8.95 per cent from 1 July. Other lenders are expected to follow. The move will add pounds 120 a year to the cost of a standard pounds 60,000 repayment mortgage.
The housing market needs plenty of first-time buyers to keep it fluid so that everyone in a chain can move along. Hugh Dunsmore-Hardy, chief executive of the National Association of Estate Agents, said the impact of six interest-rate rises under Labour had gradually filtered to the bottom of the housing market: "First-time buyers are the engine for the whole market. There is already evidence of a slow-down in the market compared with the same period last year."
The slow-down is affecting the whole market, right up to luxury properties, which have been dependent on Far Eastern money. But the crisis in the Asian economies is now having an impact, with buyers from places such as Hong Kong and Thailand pulling out.
Richard Donnell, spokesman for London estate agents FPD Savills, says: "We think the rate of growth in property prices will be 4 to 5 per cent this year, compared with 21 per cent in 1997."
Typical of the way in which the market is moving is the sale of a house in Dartmouth Park, a coveted small enclave next to Hampstead Heath, which went on sale at pounds 725,000 last month.Within two weeks the property had gone to a second agent who dropped the asking price by pounds 50,000. The house was eventually sold for less than that.
Until now, overblown prices and a shortage of properties on the market meant that first-time buyers could not find a home, but there are signs that this may well change. Ian Perry of the Royal Institution of Chartered Surveyors said: "They are being squeezed and anything that exacerbates that will make it much worse."
Next month the Building Societies Association (BSA) will consult its members and other mortgage lenders on a move to scrap the small print which forces borrowers to pay standard mortgage rates after a lower-rate special offer ends. Many first-time buyers need a low initial interest rate, or a one-off payment from a cashback mortgage, to be able to afford their first home.
According to BSA spokeswoman Pam O'Keefe, if the change is approved there will not be any more cashback and discounted mortgages. "It will reduce consumer choice and reduce the reasons for first-time buyers to go into the market," she admitted.