House price boom 'unsustainable

One of Britain's biggest mortgage lenders yesterday sounded a warning that house prices are rising at an "unsustainable rate", as homebuyers ignore worries that the global economic downturn will lead to job losses in Britain.

The Nationwide building society said the annual rate of house price growth has risen to 10.9% - more than double what it considers to be realistic - inevitably fuelling fears that the property market is heading for a repeat of the boom and bust of a decade ago.

Despite the strong house price data, the Bank of England is under increasing pressure to cut interest rates further to aid Britain's recession hit manufacturing firms.

As members of the Bank's monetary policy committee prepared for their monthly meeting to set the cost of borrowing, unions and employers jointly called for another reduction. But few City analysts think the committee will announce any change in borrowing costs tomorrow.

The Nationwide said the value of the average property rose 1.1% in July to £89,962. A typical UK home is now worth £8,500 more than a year ago. But homeowners in many parts of London and the south-east have enjoyed increases far in excess of this.

New figures from the property website Hometrack, which collects data from more than 900 estate agents in the capital, show that prices in some London boroughs have risen by as much as 12.5% in just seven months.

The borough of Waltham Forest and the City of London headed its list of hot spots, notching up price growth since the start of the year of 12.5% and 11.6% respectively. Average prices in Waltham Forest are £137,400 and in the City £255,500.

The Nationwide said buoyant consumer confidence was driving the property market up. Mortgage lending is at a record high - yet economic growth is at its lowest since 1998, with fears voiced by some that the country could face a full-blown recession.

However, the building society said consumers "do not appear overly worried" about the prospects for the economy despite the likelihood that employment and earnings growth will reduce.

"What is clear is that house prices are rising at an unsus tainable rate and that the market must slow at some stage. But here are no visible signs of this happening yet," it added.

Alex Bannister, the Nationwide's group economist, said that a sustainable annual rate of growth was more like 5%. But he said any slowdown would take the form of a reduction in price rises.

Calling for another interest rate reduction, the Manufacturing Science and Finance union said Britain was being "cut in two" because of job cuts in areas dependent on manufacturing. "The MPC must act now to ward off the economic downturn that is around the corner," said general secretary Roger Lyons.

The Engineering Employers' Federation called for a cut of 0.25% in the 5.25% rate. "The threat to jobs, investment and the survival of some companies is far greater than any misplaced fears that inflation will temporarily go above 2.5%," said director general Martin Temple.

But Simon Rubinsohn, chief economist at Gerrard Ltd, said: "The MPC is likely to see the buoyancy of the [housing] market as further justification for holding interest rates steady."