Rate rise fails to calm housing market

Homeowners have enjoyed another surge in the value of their properties over the past month, with house prices jumping by a further 1.9 per cent, according to latest figures from Nationwide.

Britain's biggest building society said the May increase pushed up the year-on-year rate of increase from 18.9 to 19.5 per cent - the fastest pace of growth for a year. The value of an average home now stands at £149,020.

The figures will fuel concerns about a possible boom-and-bust scenario for the runaway housing market.

An increasing number of doommongers have warned that the higher prices rise, the greater the likelihood of a crash. They will also stoke expectations of another rise in interest rates from the Bank of England next month. Nationwide's group economist Alex Bannister said: "In the first five months of this year, prices have risen by nine per cent compared with a rise of 5.8 per cent over the same period last year."

Nationwide expects the combination of muted earnings growth,

higher interest rates and a downgrading of homeowners' price growth expectations to slow the market over the second half of the year.

But Mr Bannister played down fears the market is heading for an early Nineties-style crash. "In the absence of a recession and large increases in unemployment, significant downward pressure on prices would be unlikely," he said. "Even if unemployment did rise, the likelihood is that interest rates would be cut aggressively. Unlike in equity markets, many homeowners would simply sit tight, resulting in a period of low activity and low price inflation."

Meanwhile, the spiralling market further increases the pressure on first-time buyers, many of whom cannot afford to get on the property ladder.

The latest price increase indicates the rise in interest rates this month has failed to take the steam out of the property market. The Bank's monetary policy committee lifted the cost of borrowing by a quarter-point to 4.25 per cent on 6 May.

The minutes of the meeting revealed that the committee considered a bigger half-point move. Economists said today's news increases the chance of another rate rise on 10 June.