House prices continue to rocket

Talk of a slowdown in the housing market looked premature as Britain's biggest building society unveiled another huge increase in property prices last month.

But while house prices remained robust, the stock market went into retreat despite the fact that the Bank of England left interest rates unchanged.

On the housing front, Nationwide said the average price of a home shot up by 2.5 per cent to £108,818 following a 3.3 per cent increase in June. The year-on-year rate of increase rose to 21 per cent - the strongest since 1989, the height of the last housing boom.

Alex Bannister, Nationwide's group economist, said: "Despite the latest data showing mortgage lending and house sales declining sharply, it is far from clear that this is the beginning of a sustained downturn. Although af fordability is increasingly stretched, particularly in the South-East, demand remains strong."

Today's Nationwide figures fly in the face of reports that the housing market is cooling. But Mr Bannister said data pointing to a slowdown may be riddled with distortions. He said: "This period always sees some seasonal slackening in demand as homebuyers take a breather from house hunting over the summer.

"Already a short month, homebuying in June was also interrupted by the Jubilee celebrations and the World Cup. Reports that mortgage lending was significantly weaker in June appear to ignore these facts."

Nationwide said the stock market slump risked hitting property prices, particularly in London. A disappointing day on the stock market saw poor figures from three of Britain's biggest companies.

Barclays' profits dropped by six per cent in the last six months after it was forced to make huge provisions for bad loans in Argentina. Shell and ICI were also high-profile casualties.

Despite the figures, Barclays still made £1.75 billion profits before tax in the half year to the end of June.

Chief executive of the banking group, Matt Barrett, said that while the financial market environment "remains challenging" indicators were beginning to show signs of improvement in Britain.

But Shell reported that underlying profits fell by a worse than expected 38 per cent to £1.42 billion in the second quarter. Investors were also spooked by poor first half results from ICI. Its Dulux paint business was hit as DIY enthusiasts downed their paint brushes to watch the World Cup during June.

The Bank of England's monetary policy committee held the interest rate at four per cent for the ninth month running, leaving the cost of borrowing at a 38-year low.

Business leaders welcomed the move. John Cridland of the CBI said: "The right thing to do was nothing. There is little need for change with stock market declines, inflation at record lows and evidence that the recovery could be slower than was thought earlier in the year."

Stephen Radley, chief economist at the Engineering Employers' Federation said: "This is the only sensible course of action."

By late afternoon the FTSE 100 index had fallen 113.1 points to 4133.1.