House-buying takes off

Renewed optimism about the economy and the lowest borrowing rates for 30 years have led mortgage lenders to predict the biggest year for house buying since the property boom of the late 1980s.

The Council of Mortgage Lenders said that the number of house purchases is likely to be the highest this decade as people are tempted to trade up or enter the market for the first time. Activity is, nevertheless, still below the levels of the late 1980s.

In the first quarter of the year, 238,000 people took out a loan to buy a house - almost 12,000 more than in the first quarter of 1998. CML figures suggest that activity in the second quarter will be equally strong. Homebuyers borrowed some £6.5bn in May, up from April's £5.9bn.

"This is another sign that activity is picking up," said Adam Cole, UK economist at HSBC in London.

Lenders said there were no signs of a late 1980s-style property bubble developing. When house prices collapsed in the early 1990s more than a million homeowners were left with negative equity in their property.

"These figures suggest that the soft landing for the UK economy is echoed in consumer confidence," said the director-general of the CML, Michael Coogan. "But it is important not to get carried away on the basis of the current figures, however. Activity in the market is buoyant, but it is not at all like the frenzied housing market of the late 1980s."

In contrast to new lending, remortgage business has reached its lowest level for a year, declining from £2.5bn to £2.1bn as uncertainty over the direction of interest rates has discouraged borrowers from trading their existing mortgages for cheaper deals.

The average interest rate on variable loans taken out last month was 5.53%, down from 5.64% in May.

But this may be the lowest borrowing rates will go. Mortgage lenders are warning that they cannot pass on the benefits of last week's rate cut from the Bank of England without endangering the rates they offer to savers, who outnumber borrowers by 10 to one.

Lenders report that homeowners remain uncertain over whether interest rates are likely to rise or fall over the next year. The uncertainty has inhibited potential customers from swapping their variable rate mortgages for products offering a discount or a fixed rate running for up to five years.

A discount mortgage would track any further falls in mortgage rates while a fixed rate would protect against any further rises.

The rates for fixed mortgages are already rising. The rates are tied to long-term money market rates - which have begun to rise over the last two months. The rises in fixed rates narrow the gap with variable rates, making it less attractive to spend time or money transferring to a new product.

Separate figures from the Building Societies Association showed that the mutual end of the mortgage market lent the largest sum last month for over two years.

"The lending figures once again reflect a strengthening housing market," said Adrian Coles, director-general of the BSA. "Last week's reduction in base rates will add to the general air of confidence which currently characterises the housing market."

The British Banking Association also reported strong lending to homebuyers and the corporate sector. Credit card borrowing saw its weakest rise for 18 months in May after bumper borrowing in April.