House prices continue meteoric rise

House prices shot up at their fastest rate in 13 years in the second quarter of 2002, and could rise by 18% by the year end, according to the latest report by Nationwide building society.

Prices rose by 3.3% in June, only slightly down on April's 3.4% rise. The rate of increase had slowed slightly in May to 2.1%, leading to speculation that the housing market could at last be cooling off. However, today's figures show the biggest annual and quarterly increases since 1989, leading Nationwide to revise it's forecast for annual rises upwards from the 10% it estimated in March to 18%.

"Annual house price inflation in London slowed to 14.8% in the second quarter, but every other region saw annual growth move higher. East Anglia saw the fastest growth again at 23.3% - it has now topped the growth league for a full year," said Alex Bannister, Nationwide's group economist.

High employment and low mortgage rates are fuelling the continued rise in property values and continued confidence that property prices will rise and mortgage rates will stay low is encouraging households to take on more debt, said Mr Bannister.

The building society predicted that the Bank of England would raise interest rates to 5% over the next six months and that such a modest rise would not stop house prices from going up.

"We do expect London price growth to continue to slow this year, with affordability and a reduction in demand for buy-to-let property both playing their part," said Mr Bannister. "The rest of the UK should continue to see strong price increases as affordability remains good."

While East Anglia has seen the strongest price growth in the last quarter, local hot spots are led by Sunderland and also include North Devon, Eastbourne and East Staffordshire.

Continued house price rises inevitably mean that affordability levels have become increasingly stretched, particularly in the capital. The building society said that in London an individual would need to earn ?49,900 to buy the average first time buyer property, with a 5% deposit and a mortgage of three times salary, compared with an average salary of around ?30,000.

In the rest of the UK, where the average salary is ?24,000, a first-time buyer using the same lending criteria would need to earn closer to ?26,000 to get on the property ladder.

Nationwide's biggest mortgage lending rival, Halifax, is due to release its own report this week and Martin Ellis, chief economist at the bank says that the general tone of the report will be "quite similar".

"We can't see any immediate signs of things slowing down, and expect the market to remain buoyant," he said. "Despite this, I don't think interest rates will go up this week - we're looking at maybe August or even beyond that. The Bank of England is still concerned about the strength of recovery from the world economy and the UK economy."

The rise in house prices was coupled with a boom in mortgage lending as approvals for new loans reached a record level during May, figures showed today.

The British Bankers' Association said that during May its members approved 253,900 new mortgages collectively worth ?16.5bn.

The group said the level, which was the highest since records began in 1997, was 25% up by number and 39% higher by value than approvals for the same month of 2001. It added that the loans would feed into strong lending in the coming months.

The increase was led by a jump in the value of mortgage approvals for house purchase, with these rising by 29% compared to the same month the previous year to ?9.59bn, with the average amount people were borrowing reaching ?88,700.