20-year boom for house prices?

HOUSE prices are soaring by more than 20% a year in many areas - and the boom could go on for 20 years. The average home is increasing in value by an astonishing £340 a week said the Nationwide Building Society, hitting first-time buyers ever harder.

Even if interest rates rise, prices are expected to carry on growing because of a desperate shortage of properties which is likely to last for two decades. House building is at its lowest since the 1920s, while economists suggest the UK has simply run out of homes.

The Nationwide's Alex Bannister warned: 'We estimate that a shortfall will continue to exist for most of the next 20 years, given current housebuilding trends and household growth.'

The figures will heap pressure on the Bank of England to raise interest rates this week above the current 40-year low of 4%. Only last week the Council of Mortgage Lenders, which represents all the banks and building societies, called for a rate rise to cool the market.

At the beginning of the year, the Nationwide and others were predicting prices would rise this year by no more than 6%. Yesterday, it revised the forecast to 18%. The Nationwide said price rises are running at an average of 19.8%, taking them up £17,625 in a year to an average of £106,693.

The worst property shortage is in London and the South East, with an influx of workers from throughout Britain and economic migrants. But many areas are seeing rises of more than 20% - specifically East Anglia, the East Midlands, the North of England, the South West and the South East, excluding Greater London. Some hot spots are even above 25% with, perhaps surprisingly, Sunderland at number one, ahead of East Staffordshire, North Warwickshire and North Devon.

The Greater London area, traditionally the engine room of the market, has seen smaller annual rises of 14.2%. This still substantial increase is lower only because prices have climbed close to an average of £200,000, putting them beyond the reach of many families.

Bannister said there is every chance that prices will continue to rise, although some City experts warned of a dangerous collapse similar to that which ended the 1980s boom.

The price boom has been fuelled by aggressive lending tactics by banks and building societies, who on Monday revealed a surge in the number and value of home loans. The British Bankers' Association said that during May its members approved 253,900 mortgages collectively worth £16.5bn. The record figures were up by 25% in terms of number and 39% in value on the same month a year ago.

Housing market analyst and economist John Butler, of HSBC, said: 'The view expressed by some policymakers in recent weeks is that current house price inflation is unsustainable and will suddenly slow of its own accord. Well, house prices are actually accelerating. While we would agree that this is not sustainable, unfortunately it is showing few signs of slowing of its own accord.'

Deputy Prime Minister John Prescott is planning to respond to the crisis by giving the go-ahead for vast new towns and villages on greenfield sites. The controversial plan will be portrayed as a leg-up to first-time buyers and key workers, such as teachers and nurses, who are struggling to buy.

Plight of the first-timers

FIRST-TIME buyers face being locked out of the housing market unless they take on massive and dangerous loans. They need an income of £26,000 and a lump sum of more than £4,000 to buy a typical first home at £82,000, the Nationwide said. The £26,000 figure is £2,000 above the average wage for all workers, let alone those in the early stages of their career.

In London they are even more stretched, with a salary of more than £49,000 and a deposit close to £8,000 needed for a starter home at £156,000.

The society makes the traditional assumption that buyers have a deposit of 5% and borrow a maximum three times salary. However, both banks and borrowers have found ways to bust out of this prudent system and chase the runaway market. Some lenders are giving loans of five or six times salaries. Others are lending more than 100% of the value of the property so buyers can furnish or improve their new home.

At the same time, young people are staying at home or in rented accommodation for much longer, so they can save for bigger deposits of at least 10%. The average age of a first-time buyer has risen from 29 to 34 for the UK over the last 25 years, while it is now 35 in London and 36 in the South East and East Anglia.

Big loans are not a problem so long as home loan rates remain at their current 40-year low of 4% or even 5%. But a rate rise would devastate many young buyers.