Housing market set to slow

House prices are rising at an "unsustainable rate", the Nationwide Building Society warned today as figures revealed a 1.1% increase during July.

During the year to the end of July, prices rose by 10.9%, increasing the average cost of a house to £89,962.

Although July's increase was down on June's rise of 1.9%, Nationwide said it was "increasingly likely" that it would revise its current forecast of a 7% jump in house prices during 2001.

"House prices are rising at an unsustainable rate and the market must slow at some stage, although there are no visible signs of this happening yet.

"If homebuyers remain confident about the housing market and their ability to finance their mortgages, an upward revision to our forecast will become almost certain."

Alex Bannister, Nationwide's group economist, said although there had been a "modest slowdown" in the pace of growth during July, prices were still rising significantly faster than a year ago.

In July last year, prices fell by 0.3% in response to slower salary growth and fears that the London housing market was overheating.

He said the group had forecast a 7% increase for the year on the assumption that growth in London and the south-east would slow to a more sustainable rate during the year, but there was currently no evidence that this was happening.

Mr Bannister added that Nationwide still predicted a weakening in consumer confidence, leading to lower house price inflation later in the year. But he said, at present, there was "no discernible dampening effect" on the market.

The group said the market's buoyancy had brought an upturn in sales, with more first-time buyers emerging.

Simon Rubinsohn, chief economist at stockbrokers Gerrard, said he did not think house prices were rising at an unsustainable rate and the market should remain "firm".

Despite the double digit growth in house prices, annual house price inflation was rising at only around half the rate it increased by during the 1980s. Low interest rates meant that despite the high prices, property was still affordable, as monthly repayments on mortgages remained low.

"I do not see a real risk of a repetition of the 1980s. We would need to see a more substantial rate of growth in housing prices.

"Unless we see some meaningful deterioration in consumer confidence, the market is looking to remain firm."

Mr Rubinsohn added that the high price increases were concentrated in London and south-east England.

House sales during the first three months of 2001 were 10% lower than during the previous year, but the number of people moving house has now increased, and mortgage approvals for buying houses are now 15% higher than last year. Nationwide predicts that during 2001, around 1.4 million homes will change hands.

This figure is similar to last year's house sales, but "well down" on the level reached during the 1980s boom, when around 2m houses were sold in a year.