House price rises at 14-year peak

HOUSE prices rallied by 1.9% in December to lift the yearly increase to its highest since 1988. A survey by Britain's largest building society, Nationwide, revealed the average price of a house in Britain rose by £11,000, or 13.8%.

The last time house prices rose on this scale Margaret Thatcher was Prime Minister and gazumping stalked the market. It all ended in disaster in the following years when negative equity and house repossession dominated.

Following 11 September there were fears that the housing market would suffer. During November Nationwide reported that house price rises had been confined to 0.7%. But house sales increased by 14% during October, with 140,000 sold.

The rise in house prices of 1.9% last month was a remarkable recovery and illustrates the apparent resilience of the housing market in Britain. Nationwide believes that this year house price rises will be up by 6% with the slowdown more pronounced in London and parts of the South East.

House sales are likely to be held back by fewer first-time buyers and owners trading up, often on the back of remortgaging. The Nationwide report follows a warning today from the Bank of England's Deputy Governor Mervyn King, who said the British economy faces a 'bumpier ride' this year. King said the Bank's central forecast was that there would be slower growth in the first half of the year and then a stronger pick-up in the second half.

Nationwide believes house prices will rise over the next few months before the market enters a period of stagnation which could last until the autumn. 'We would then expect a recovery on the back of improving pay and job prospects.'

During 2001 London slipped down the growth league but still managed price increases of 14%. In the past five years the capital's property prices have more than doubled.

Londoners face a problem of affordability, according to the Nationwide. Prices are 70% above their 1988 peak, while incomes are 82% higher. 'As a result we expect price growth to slow most in London led by a deterioration in pay, particularly lower bonuses, and job prospects in the City. This will spill over to the surrounding commuter belt, which will also see a sharp slowdown in growth. The rest of the South East should see price rises decline less markedly.'