House boom may derail recovery

Mortgage lenders and economists warned yesterday that a repeat of the late 1980s housing boom could derail the economic recovery in Britain.

Rising property prices will encourage more than 1.5m Britons to move house next year - the highest number for over a decade - according to economic forecasters. Mortgage rates have recently hit a 30-year low, allowing more people to get a foot on the bottom of the property ladder.

If the housing market gathers too much speed the Bank of England will be forced to puncture its rise with higher interest rates, according to the Ernst & Young ITEM economic forecasting club.

House prices are expected to rise by 8% this year and next, says the ITEM club, which uses the treasury's model to predict developments in the economy. "A major expansion [in the housing market] is already set in place, with both the economic and psychological factors pointing in the same direction for the first time since the Lawson boom," the forecasters say.

A repeat of the 1980s, during which housing prices rose by as much as 25% a year, would be a disaster, concludes the Council for Mortgage Lenders. "The establishment of a low inflation, low earnings-growth environment means that we cannot afford it."

But ITEM club members believe the knock-on effect on jobs from the economic slowdown last year will take the steam out of the market and should ensure that Britain avoids another boom and bust scenario in housing.

"If people's confidence is held back by the threat of job losses it will have a calming effect on house prices in the autumn. I think the odds are still against a Lawson-type boom, " said the ITEM club's economic adviser, Peter Spencer.

Buying a home is almost 60% cheaper than it was a decade ago, according to research carried out for the Cheltenham & Gloucester's affordability index.

Cheltenham & Gloucester predicts that the average home buyer will spend only £26.20 of their total weekly pay packet on their mortgage this year, compared with £71.30 less than 10 years ago.

Buyers should not get carried away by the cheap lending rates at present on offer, warned Rober Burden, managing director of Cheltenham & Gloucester. "Lenders and borrowers must each take a responsible approach, and not forget that both interest rates and house prices can rise as well as fall."

Last winter's economic slowdown barely touched the services sector, which is behaving like a juggernaut "surging forward unstoppably, almost irrespective of what happens in the rest of the economy," according to the ITEM club.

Britain was looking increasingly like the United States, which experienced sustained growth after deregulating its labour and product markets.

"These developments pose searching questions for economic forecasters, who have consistently underestimated the resilience of the US economy and could now be making the same mistake in the UK," the report notes.

• Average pay settlements are edging down but remain well above inflation, according to separate figures from wage specialist Incomes Data Services. Headline inflation has dipped to 1.3%, encouraging bargainers to settle at lower levels. A quarter of new deals are below 3%, a higher proportion than earlier in the year.