House prices could soar 20%

HOUSE prices are set to rise by more than 20% a year, City analysts suggested at the weekend. A leading investment bank believes a leap in London house prices this summer will trigger similar increases across the country.

A surge in demand for London properties and a lack of homes for sale will push prices in the capital sharply higher, according to Danny Gabay, UK economist for JP Morgan. This will fuel house price inflation nationally, he said.

Until recently the London property market has acted as a brake on the rapid rise in house prices elsewhere. Over the past year, the cost of homes in London has barely increased. Demand in the capital was hit by the September 11 terrorist attacks and the knock-on slide in the stock market.

But the latest survey from the Royal Institute of Chartered Surveyors reveals a sudden jump in inquiries from househunters. Its measure of estate agents reporting a rise in buyers rose from just 3% in April last year to 40% this April.

Gabay believes a steep increase in demand for London homes will send property values soaring in the capital. 'There is too much money chasing to few homes,' he said. 'No supply and a surge in demand is a lethal cocktail for inflation.'

The warning comes as house prices rose by 4.2% in May, the biggest monthly rise since records began in 1983. The previous high was 4.1% in July 1988, just weeks before the market went bust.

According to figures from the Halifax this month, the average cost of a home rose from £102,808 to £107,152 in just four weeks. The leap takes annual house price inflation to 18.5%.

Some observers fear the property market could be heading for another spectacular collapse. The latest figures are good news for homeowners but will add to the gloom of first-time buyers. They also mean it will be even harder for key workers such as nurses and firefighters to afford homes in London and the South East.

Meanwhile, as the property market soars an investigation has been ordered into dubious practices among estate agents. The inquiry, into profiteering and corruption, will be conducted by the Office of Fair Trading. Prompted by a record number of complaints, the investigation is likely to examine gazumping, a legal but widely despised ruse in which a house seller in a rising market increases the asking price after acquiring a buyer. Estate agents usually act as middle men in gazumping and profit from the higher prices.