House price boom keeps rolling on

Jane Padgham12 April 2012

TALK of a slowdown in the housing market looked premature today as Britain's biggest building society unveiled another huge increase in property prices during July.

Nationwide said the average price of a home shot up by 2.5% to £108,818 following a 3.3% increase in June. The year-on-year rate of increase rose to 21% - the strongest since 1989 and the height of the late-Eighties housing boom.

The news reinforced expectations that the Bank of England will keep interest rates at a 38-year low of 4% when it sets monetary policy later today, despite recent stock market turmoil. But it also heightened fears the property market is heading for an early Nineties-style crash.

Alex Bannister, Nationwide's group economist, said: 'Despite the latest data showing mortgage lending and house sales declining sharply, it is far from clear that this is the beginning of a sustained downturn. Although affordability is increasingly stretched, particularly in the South East, demand remains strong, driven largely by a favourable economic backdrop.'

Bannister said the market was also being buoyed by the belief that interest rates will remain lower than in the past, with buyers willing to take on bigger homeloans given the appeal of property over other investments, such as shares.

He said: 'There is a risk that some households will overstretch themselves and we would urge lenders and borrowers to maintain a prudent and cautious approach to home buying.'

Nationwide said that although independent reports that the housing boom is cooling were hard to verify, the stock market slump risked hitting property prices, particularly in London. Residential property experts Hometrack last week reported a decelerationin London house price rises for the second month in a row in July.

Bannister said: 'With unemployment up by 15,000 in London since its low point in July 2001 we will be watching closely for any effects on the London market. Outside of London affordability remains good and the effects of equity market weakness should be relatively muted.'

Financial bookmakers City Index today predicted prices in England and Wales will fall 8% between September and March 2004. London house prices will dive by 11%, with Islington, Hammersmith & Fulham and Kensington & Chelsea among the worst-hit boroughs. The figures are based on bets placed with the bookie.

Today's Nationwide figures fly in the face of a slew of reports that the housing market is cooling. Figures from the Bank of England earlier this week showed the biggest drop in mortgage borrowing for two years.

Rightmove, Britain's biggest property website, said prices are rising more gradually than in recent months. City firms Deutsche Asset Management and Merrill Lynch recently forecast a sharp slide in the capital's house prices. Mortgage lender Woolwich said confidence in the housing market is starting to falter. And the Royal Institution of Chartered Surveyors said inquiries from potential buyers has fallen back.

But Bannister said data pointing to a slowdown may be riddled with distortions. 'This period always sees some seasonal slackening in demand as homebuyers take a breather from house hunting over the summer. In addition, the interpretation of figures for June is difficult.

Already a short month, homebuying in June was also interrupted by the jubilee celebrations and the World Cup. Reports that mortgage lending was significantly weaker in June appear to ignore these facts.

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