Record rise for house prices

HOUSE prices rose by a record amount last month, fuelling concerns of a slump in the property market. The average cost of a home increased by more than 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, the average cost of a home rose from £102,808 to £107,152 in a month. The leap takes annual house price inflation to 18.5%, with some observers fearing that the property market could be bound for another spectacular collapse. It will also add to pressure on the Bank of England to raise interest rates when the monetary policy committee meets pn Wednesday and Thursday.

The latest figures are good news for homeowners, who are enjoying higher returns on their investment than ever before. But they will add to the gloom of first-time buyers. They also intensify the problem of key workers such as nurses and firefighters being unable to afford homes particularly in London and the South East. Yet many property analysts still believe house price inflation will slow down soon of its own accord.

Halifax experts attributed last month's huge rise to a combination of low interest rates, low unemployment and limited supply of homes. The bank had forecast that annual growth would slow to about 7% by the end of this year, but now says it is likely to remain in double figures.

Halifax's group economist Martin Ellis said: 'It is clear that house prices will not slow as quickly as we predicted earlier in the year. Probable interest rate increases in the next few months should ease the pace of future house price growth, however.'

He added that the ratio of house prices to average earnings stood at 3.7 in May, well below the peak of 5.0 and only a little above Halifax's long-term historical average. That means mortgage repayments are still a relatively small part of income - around 20% in London, compared with past peaks of 27%. Ellis said the current low cost of borrowing meant that owning a home remained 'an affordable proposition for most people in most parts of the country'.

The Halifax figures echo a survey released by the Nationwide last week putting house price inflation at its highest since the 1980s. The Bank of England also announced last month that mortgage borrowing across Britain hit a new record level in April. About 127,000 new loans - worth £5.7bn - were taken out in a month, the largest number in 14 years.

But there are signs of an end to the boom in the buy-to-let property market, as too many landlords are now chasing too few tenants, forcing average rents sharply downwards for the first time in years. That, combined with the limited spending power of first-time buyers will eventually curb house price inflation, experts predict.

Alex Bannister, Nationwide's group economist, predicted that prices would not collapse, but slow to between 4% and 5% a year. An interest rate rise is also likely in the coming months, as Chancellor Gordon Brown's tax-raising Budget seems to have done nothing to dampen consumer spending.

The Bank of England has held interest rates at 4% - the lowest level since the 1960s - to help manufacturers through the economic slowdown, but it is widely expected to raise levels over the summer