Housing market boom swamps lenders

Britain's already buoyant housing market is poised for a summer boom after tumbling interest rates pushed demand for home loans to a record high last month.

Analysts said Bank of England figures which showed a £4.2bn jump in outstanding mortgage debt in May were evidence that both activity and prices would rise strongly in the coming months.

Lenders approved a record 107,000 new home loans, up from 100,000 the month before and well above the recent monthly average of 98,000. The 8.4% annual rise in mortgage borrowing provided further evidence of Britain's two-speed economy, with the strength of domestic demand counteracting the weakness of manufacturing. Yesterday's data was seen as diminishing the prospect of a further interest rate cut when the bank's nine-member monetary policy committee announces its decision on Thursday.

Jonathan Loynes, of Capital Economics, said he expected house prices measured by the Halifax index to jump from just over 7% to 10% by the autumn. "Mortgage approvals are a fairly good indicator of short-term movements in prices," he added.

Estate agents are already noticing signs of an overheating market, with first-time buyers struggling to get a foot on the property ladder. "It is difficult to find the right property at the right price," said Ian Perry, spokesman for the Royal Institute of Chartered Surveyors. "First-time buyers are getting squeezed into different areas to those they would like to live in."

Mortgage lenders have found themselves swamped with applications following the three cuts in interest rates by the bank this year. The Portman building society said it had taken the drastic step of closing its doors to people looking to switch their mortgage over to it after seeing a sharp increase in remortgage business. As of last night the Portman has stopped accepting remortgage applications "for the time being" and will only be offering mortgages to people who are purchasing a house.

David Bitner at Bradford & Bingley MarketPlace, the UK's largest high street independent financial adviser, said it was having to tell some of its mortgage customers that instead of their home loan taking six to eight weeks to sort out, they may have to wait three to four months.

Britannic Money said yesterday it was "regrettably" having to prioritise applications, with those for house purchase tending to be dealt with ahead of remortgages because of the "time-sensitive" nature of the homebuying process.

"We are victims of our own success to some extent," said a spokesman. Britannic Money had drafted 30 extra staff into its mortgage processing department and expected to have all the backlogs cleared in three weeks, he added.

Although home price rises are far lower than the 30% recorded at the height of the Lawson boom of the late 1980s, the bank is anxious to prevent an overheating property market stoking up inflation in the rest of the economy.

Alex Bannister, group economist at the Nationwide building society, said he expected the pressure on the house market to ease off before 2002, as the effects of the global slowdown began to be felt. "The pace of house price increases we have seen recently is probably not sustainable," he said. "Consumer confidence will wane later this year."