House price inflation rises again

House prices are rising at their fastest rate for more than 13 years and could continue double-digit growth for the next year, mortgage lender Nationwide said today.

The cost of a home rose by 2% last month, pushing growth for the year to the end of November up to 25.5%, according to Nationwide's figures. The increase meant the average cost of a house is now ?115,761, up from ?93,544 at the start of the year.

Alex Bannister, a Nationwide group economist, said: "The strong upward trend in prices continued in November with the price of the typical home up 2%, or just over ?2,000, on a month earlier. November's price rise takes the year-on-year increase in prices above the 25% mark for the first time in over 13 years."

There had been speculation that the market was beginning to slow down after Nationwide reported a price increase of 1.4% in October, down from 2.1% in September and 2.5% in August. But the building society today said further double-digit growth during 2003 could not be ruled out.

"Despite recent comments suggesting a gloomy outlook for 2003, we expect the market to slow modestly in response to deterioration in labour market conditions and some increase in mortgage rates," Mr Bannister said. "However, it will be affordability that increasingly provides a brake on the market - not just through difficulties for the first-time buyer, but also for existing homeowners."

He added that a gradual slowdown in the market was more likely than a sharp fall in prices, because while borrowers had taken advantage of low interest rates to increase their debt levels, their borrowings were not excessive.

He said a rise in interest rates next year and high-profile redundancies could hit the market, but the underlying strength of the economy and the affordability of property in many regions meant there could be further strong growth to come.

Nationwide said the ripple effect, whereby strong increases in London and the south-east spread to other regions, continued during November, reaching the typically cheaper areas of the country such as Wales and the north.

It added that despite anecdotal evidence suggesting there had been price falls at the top end of the market, its indices, which track the price of homes in the middle of the market, showed a steady pattern of price rises.

John Butler, an economist at HSBC, said: "The UK housing market remains buoyant at a time when global uncertainties have increased. We believe house prices and consumer spending will slow next year, but the threat of a crash has increased."

He added that a crash needed a trigger, such as a rise in rates or rapidly rising unemployment.

He said: "Both the Halifax and Nationwide are predicting between 7% and 10% house price inflation in 2003. With average earnings growth of 4% to 4.5%, that would push house price-to-income ratios well above the late 1980s peak.

"To us, 2004 seems more of a worry than 2003, and that is just the time when the chancellor's public finance projections are gambling on a strong and sustained recovery."

Simon Rubinsohn, chief economist at Gerrard, said: "One particular concern surrounding a possible fall in house prices is the impact this could have on consumer confidence, particularly if there is a return to negative equity."

However he said property transaction volumes were currently well below the level seen in the late 1980s.

Mr Rubinshon said: "This, coupled with the more modest degree of equity withdrawal in real terms this time around, implies that rather fewer homeowners are vulnerable to falling into the trap of negative equity from a small decline in house prices than was the case a decade ago."