Surge in house prices fuels interest rate fears

British house prices last month recorded their biggest increase this year according to the Halifax, prompting fears the Bank of England may raise interest rates in response.

The 1.6% rise during September undercut the assumption that the price boom of recent years had reached a plateau.

The Bank of England, which starts its monthly review of interest rates today, has been concerned that higher house prices encourages people to save less and spend more, fuelling a consumer boom that can quickly run out of control.

These fears were cited among others for its decision to raise rates four times between September 1999 and February this year.

But with the Nationwide Building Society releasing conflicting figures, citing a 0.4% gain last month, most analysts believe the Bank of England will overcome its concern and follow its American counterpart in keeping policy steady.

The Halifax - Britain's biggest mortgage lender - said that house prices rose by 1.6% in September to stand 9.2% higher on the year. That compares with growth of 0.5% in August, and an annual rate of 7.4%. Nationwide Building Society figures for last month show a smaller 0.4% gain in house prices.

Economists explain the discrepancy by pointing out that the Nationwide is more biased to the south of England, where prices have been under greater pressure following heady rises seen in recent years.

However, the Nationwide's annual rate of house inflation at 10.2% is higher than the Halifax's estimate.

In the Halifax series, the annual rate has now returned to the level seen in June, though it remains well below the 16.0% peak reached in January.

September marked the third monthly rise in a row following four falls during the five months between February and June. "Overall, the latest monthly figures suggest that the housing market has stabilised following the sharp slowdown earlier in the year," the Halifax report said.

The bank said the fall in prices between February and June appeared to have been a temporary correction following a period of rapidly rising prices.

While it felt that housing demand was likely to be underpinned by a sound economic background, "the rise in September is unlikely to mark a return to rapid house price inflation".

The Halifax said the average price of a home is now a seasonally-adjusted ?86,304.