Habitat selection is a crucial decision for any organism. Selecting a high quality site will positively impact survival and reproductive output. Predation risk is an important component of habitat quality that is known to impact reproductive success and individual condition. However, separating the breeding consequences of decision-making of wild animals from individual quality is difficult. Individuals face reproductive decisions that often vary with quality such that low quality individuals invest less. This reduced reproductive performance could appear a cost of increased risk but may simply reflect lower quality. Thus, teasing apart the effects of individual quality and the effect of predation risk is vital to understand the physiological and reproductive costs of predation risk alone on breeding animals. In this study we alter the actual territory location decisions of pied flycatchers by moving active nests relative to breeding sparrowhawks, the main predators of adult flycatchers. We experimentally measure the non-lethal effects of predation on adults and offspring while controlling for effects of parental quality, individual territory choice and initiation of breeding. We found that chicks from high predation risk nests (<50 m of hawk) were significantly smaller than chicks from low risk nests (>200 m from hawk). However, in contrast to correlative results, females in manipulated high risk nests did not suffer decreased body condition or increased stress response (HSP60 and HSP70). Our results suggest that territory location decisions relative to breeding avian predators cause spatial gradients in individual quality. Small adjustments in territory location decisions have crucial consequences and our results confirm non-lethal costs of predation risk that were expressed in terms of smaller offspring produced. However, females did not show costs in physiological condition which suggests that part of the costs incurred by adults exposed to predation risk are quality determined.