House prices set to rise by 20%

A leap in London house prices is set to trigger a further acceleration in Britain's property boom, with annual increases bursting through the 20 per cent barrier, City experts claim.

Surging demand from would-be homebuyers in the capital, combined with a lack of property for sale, is predicted to send prices soaring and fuel price inflation nationwide, say analysts at City investment bank JP Morgan.

Until recently, the normally frothy London property market had acted as a brake on the rapid rise in prices across the country. House prices in the capital barely increased over the past year but there have been double-digit gains in other parts of the country.

Demand for housing in the capital was hit by the 11 September attacks and the slide in the stock market.

However, the latest survey from the Royal Institution of Chartered Surveyors has found a sudden leap in inquiries from househunters, with estate agents reporting a hike in the number of buyers from three per cent in April last year to 40 per cent this April. JP Morgan analyst Danny Gabay believes a summer surge in demand for London homes could send the capital's property values spiralling upward, accelerating the national market.

"Too much money is chasing too few homes," he said. " Unfortunately, though hardly surprisingly, London has by far the smallest stock of unsold properties. No supply and a surge in demand is a lethal cocktail for inflation."

A straw poll of London surveyors showed limited supply, with frustrated buyers pushing prices up because of a lack of quality property to satisfy demand. Last week, Halifax figures recorded a record 4.2 per cent jump in prices.

Homebuyers heaved a sigh of relief last week when the Bank of England held interest rates at four per cent despite warnings the price boom threatens to run out of control because of cheap borrowing.

First-time buyers are now entering the era of the never-ending mortgage. Lenders have admitted that the race to win big returns from the market has led to loans that will take much longer than the traditional 25 years to pay off.

Payback periods are so long that they threaten to leave some buyers with a lifetime of debt if the house price bubble bursts.

Ray Boulger, of mortgage broker John Charcol, said: "Loan terms of 30, 40 or even 50 years do not seem as drastic as they would have done 30 years ago when life expectancy was considerably less."

Britain might even follow Japan, where soaring prices in the 1980s led to 100-year loans with parents leaving the debt to their children.

Mr Boulger said: "UK house prices are continuing to rise in excess of earnings, therefore people are looking for larger loans."

The drift towards the 50-year mortgage is being driven by costs in London and the South-East, which threaten to leave first-time buyers out in the cold and out of the one-way bet which many believe the housing market offers.

Nationwide and Abbey National are offering 35-year terms, and the Bank of Scotland is making available loans lasting 40 years.

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