House prices still booming

THE chances of another base rate rise rose today after new figures confirmed that there has been no slowdown in the housing market.

The Nationwide‘s survey of the market showed house prices up a seasonally-adjusted 1.9% in May to register a year-on-year rise of 19.5%.

This compares with 2.1% and 18.9% respectively in April, indicating that there has been no let-up in the market despite the Bank of England‘s best efforts.

But although the figures will alarm economists who had been hoping to see some sort of tempering of prices after three base rate rises, the Nationwide itself said it expected to see the growth rate tail off over the rest of the year. This was because first-time buyers had been substantially priced out of the market, it believed.

The building society added that mortgage demand continued unabated and it had recorded the highest level of mortgage approvals last month for more than 10 years.

Demand for mortgages is being driven by consumers who fear that base rates will continue rising and push the cost of mortgages up to levels not seen for several years.

According to the Nationwide‘s figures, the price of the average house in the UK is now £149,020 – up from £145,918 in April.

Nationwide‘s group economist Alex Bannister said the figures underlined the extent to which first-time buyers are being priced out of the market. This meant there was an even greater chance that the housing market would just run out of steam and take a considerable period to get back to a more realistic level.

He said: 'Given the current momentum in the market there is now some upside risk to our forecast. With many potential first-time buyers currently unable to enter the market and also high and persisting real debt burdens constraining existing homeowners' ability to trade up in the future, there is a growing potential for a drawn out period of low activity and low price growth.'

The Nationwide forecasts a 15% increase in house prices for the 12 months to December this year, which implies an average monthly rise of just 0.7% for the rest of the year.

Most housing market experts believe that base rates will rise to between 4.75%-5.00% by the end of the year, helping to dampen the housing market.

The Council of Mortgage Lenders played down fears of a huge rise in rates earlier this week after a Press report claimed it had predicted that the Bank of England would have to double interest rates to o control house prices.

Economists fear that such a move by the Bank would spark a housing market crash and destroy levels of consumer confidence, potentially pushing the economy into recession.

Prime Minister Tony Blair waded into the row on Tuesday when asked to comment about Bank of England remarks that it was not its role to prevent a housing market crash.

Blair insisted that the current system of managing interest rates, introduced by Labour after the 1997 General Election, was satisfactory. He declared: 'It certainly is the Bank of England's job to ensure inflation is controlled, as it has done very successfully. The new framework of economic management has worked very well.'

The Bank's target, set by the Government, is 2% overall inflation as measured by the consumer price index. It has no mandate to control housing prices although some members of its monetary policy committee have expressed concern about their sharp rise.

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