Melanie Bien: If housing subsides, you don't have to go under

Last week began with some startling news, shaking many homeowners out of the complacency we've happily fallen into: property prices won't continue to increase at a pace but could actually crash.

Last week began with some startling news, shaking many homeowners out of the complacency we've happily fallen into: property prices won't continue to increase at a pace but could actually crash.

Most of us take a rise in house prices for granted, factoring it into our calculations of how much spending power we'll have in future. I'm thinking of selling in the spring and moving somewhere bigger, for example, and hope my flat will be worth slightly more then than it is now. But this won't be the case if Mervyn King is to be believed.

Mr King, in his role as Governor of the Bank of England, last week warned that fresh interest rate rises are inevitable and prices could slump. And this man knows what he's talking about, unlike those many "experts" over the years who have predicted crashes that never materialised.

Numerous friends of mine believed what they heard and put off buying in the belief a slump was imminent. I remember it being said that prices were unsustainable when I bought my first home - and that was five years ago. So how likely is it that Mr King will be proved right?

Well, interest rates will rise. We've had four increases in the base rate since last November, taking it to 4.5 per cent, and many economists predict it will be at least 5 per cent by the end of the year, possibly even 5.5 per cent. But put in context, that is still amazingly cheap: in the early 1990s, interest rates were almost triple this.

The real question is whether the market will crash, and here there is less certainty. Mr King says the chances of this have increased, with property prices at levels few would regard as sustainable, and there are signs that the market is starting to ease off.

But the slowdown is the crucial thing. If enough people hold off from buying and the steam goes out of the market, a crash may be avoided. The Royal Institution of Chartered Surveyors believes this is already happening. And if this cooling-off period continues, we should escape all the heartache and fallout that a property crash would bring.

Whatever happens, there is little you or I can do to change the grand scheme of things. But we can take steps to cushion ourselves against the worst effects.

First, check what mortgage rate you are on (if you already own a home) to ensure you can cope with the inevitable rise in interest. Switch to a fixed rate, pay off a chunk of the mortgage if you've got savings lying idle, and don't take on any more debt in the short term.

If you are buying a home, avoid the temptation to overstretch yourself. As already noted on page 25, this is easier said than done when affordability is such a problem; the Council of Mortgage Lenders last week revealed that the number of first-time buyers is at its lowest level since records began 30 years ago. It's hard to resist borrowing as much as you can to get on the housing ladder, but it isn't wise - even without Mr King's comments.

And if you are considering buying, it might be worth holding off to see how things pan out. That said, if you are hoping for a devastating crash - resulting in rock-bottom prices that allow you to swoop for a bargain - you could well be disappointed.

Cheque mate

Mr King had a busy week. As well as his warnings on house prices, he drew attention to a scandal that the financial services industry has done nothing to address: the time it takes to clear a cheque.

Isn't it ridiculous that banks can take several working days to clear funds? In all the time I've had a bank account, never once has a cheque I've paid in bounced.

The Association for Payment Clearing Services denies Mr King's claim that it takes longer to process cheques and electronic payments in this country than in any other major economy, although I wouldn't be surprised if this were true. It certainly feels like an unnecessarily long time.

It's time for the banking industry to pull its finger out, and fortunately that may be exactly what is about to happen because the Bank of England is teaming up with the Office of Fair Trading to make the banks speed the whole process up. Not a moment too soon.

m.bien@independent.co.uk