Rate rises put brake on house prices

Further tentative signs of a slowdown in the housing market emerged yesterday as the Nationwide reported a slower rise in house prices this month and the Bank of England said mortgage lending had decelerated in May.

The building society said the price of the average house rose 0.9% in June from May, a much slower increase than May's 1.7% and the smallest rise since January.

It said the average house is now worth £151,524. Prices were still a hefty 19.1% higher than a year earlier.

The lender said prices had already risen 10% in the first half of the year. But it expected growth to be weaker in the second half of the year, leaving prices about 15% higher in December than at the start of the year.

It attributed the expected deceleration to "higher interest rates, worsening affordability, reduced demand for buy-to-let and a downgrading of buyers' expectations of future price growth".

Shockwaves have rippled through the housing market over the past couple of weeks as Bank of England governor Mervyn King has twice warned that, after the strong rises of recent years, house prices were in greater danger of falling.

The Bank has raised interest rates four times since November, to 4.5%, and the monetary tightening seems finally to be having an effect.

"The unexpected acceleration in house price inflation during the first half of this year is now beginning to be reversed in response to the rise in mortgage rates and the well-chosen words of Mervyn King," said Simon Rubinsohn, economist at brokers Gerrard Limited.

Separate Bank figures yesterday showed net new mortgage lending fell to £8.6bn in May from £9.4bn the month before, appearing to support the idea of a slowdown in the housing market.

But the number of new mortgages approved by lenders rose to 127,000 from 124,000 in April, casting doubt on whether the housing market was really slowing. The approvals data are more forward-looking than other figures.

Also, consumer credit rose by a stronger-than-expected £1.6bn due to a thirst for credit card borrowing.

"Approvals are now at a level consistent with house price inflation rising back up to around 25%-30%," said Vicky Redwood, analyst at Capital Economics.

"This is in contrast to recent data suggesting that the housing market has now started to weaken.

"Overall, today's figures suggest that it is too early to conclude that a major downturn in the housing market is now under way."

Economists said that, while they did not expect the Bank's monetary policy committee to raise interest rates again in July, an August rise was on the cards with more to follow in the succeeding months.

The MPC will be concerned by other data issued yesterday showing a sharp slowdown in consumer confidence.

The GfK confidence index unexpectedly fell back to minus four from minus two in May.

"The index has dropped in June, demonstrating the reaction of consumers to the recent Bank of England interest rate rise to 4.5% this month and speculation of further increases," said GfK director Grant Montague.

Separate figures from the United States showed consumer confidence hitting a two-year high.

Interest rates in America remain at a 46-year low of 1% although the Federal Reserve is likely to raise rates by a quarter-point later today.