Biggest monthly house price rise surprises bank

Britain's biggest mortgage lender, the Halifax, yesterday reported the biggest monthly rise in house prices since its records began 19 years ago, as buyers scrambled to get on the property ladder amid fears of missing out on the boom.

A 4.2% increase in prices during May took the bank by surprise, forcing its economists to rip up their forecast for a sharp slowdown by the end of the year. The sudden jump will fuel calls for an interest rate rise when the Bank of England's monetary policy committee meets on Thursday.

The surprise increase pushed the average property price up to £107,152, a year-on-year rise of 18.5%. Halifax admitted it had abandoned its prediction of a 7% increase for the year, saying it expected a double-digit surge which could exceed last year's 11% rise.

Halifax put the strength of the market down to low interest rates, low unemployment and a shortage of quality homes, together with a growing "buy to let" trend in the south-east. Furthermore, it said a "fear of getting left behind" was pushing people onto the property ladder.

Group economist Martin Ellis said: "It is clear that house prices will not slow as quickly as we predicted earlier in the year."

His remarks marked a major climbdown for the Halifax, which clashed with rival Nationwide last month on the prospects for house price in flation. Halifax had been predicting only modest growth, contradicting Nationwide's reports of a boom.

A Halifax spokesman said: "The strength of the housing market has taken everybody by surprise. All the major commentators have been upping their figures. At the beginning of the year, there were signs that it would begin to slow down but the market hasn't acted in the way we thought it would."

The two lending banks' house price figures are closely watched by the monetary policy committee, which most experts believe will keep interest rates on hold at 4% this month. The committee has left rates unchanged for six months to help manufacturers through the slowdown.

Pressure for a rate rise is growing, however, with credit card spending at record levels. Halifax yesterday said it believed rates would be at 4.5% by the end of this year, then 5% next spring, in changes which could finally dampen the craze for homebuying.

Halifax said it did not believe the housing market was heading for a crash comparable to the "boom and bust" cycle of the 1980s. A spokesman said: "The marketplace is totally different now from the late 1980s. Back then, we had very low interest rates which then doubled in 18 months. Peoples' income didn't keep pace, making boom turn to bust."

The bank's "affordability" index shows houses cost an average of 3.7 times average earnings - only a lit tle above the long-term average and well below the peak of five times earnings. Halifax said this "demonstrates that owning a home remains an affordable proposition for most people in most parts of the country".

Halifax had reported virtually static house prices in March and April, with rises of 0.3% and 0.7%. Its findings for May once again contradicted the Nationwide, which last week suggested the rate of increase may have peaked, with a rise of 2.1% last month compared with 3.4% in April.

Halifax's previous record month was in July 1988, when house prices rose by 4.1%. Among the factors believed to be accelerating prices this time is a slowdown in construction - the number of new homes completed during 2001 fell for the first time in nine years.