Surge in house prices increases pressure for interest rate rise

Britain's homeowners were facing the threat of the first increase in mortgage costs for nearly four years yesterday after news of a fresh surge in house prices convinced City analysts that the Bank of England will raise rates next week.

House prices jumped 2% in October, the biggest rise for more than a year, according to the Nationwide, Britain's largest building society.

With the property market heating up again, rates look almost certain to rise from their current 38-year low of 3.5% when the Bank's nine-strong monetary policy committee announces its decision on Thursday. Interest rates came close to being raised when the MPC met last month.

After a month of improving economic news and the revelation that homebuyers are taking on increasingly large mortgages in a bid to get a foot on the property ladder, a quarter point rise is seen in the City as the likeliest outcome.

"Hopefully this should help slow the current unsustainable rates of household borrowing," said Ciarán Barr, chief economist at Deutsche Bank. "If the consumer sector does not react and forces the Bank into aggressive interest rate increases, then it will inevitably sow the seeds of the next downturn."

Nationwide said there had been a "sharp increase" in the number of homeowners taking out new mortgages in excess of the traditional 3.5 times salary formula.

An investigation for the BBC revealed last week that some estate agents are encouraging first-time buyers to lie about their incomes in order to qualify for higher mortgages. The lender Birmingham Midshires this week suspended three mortgage advisers following the allegations.

The Nationwide said that the value of the average UK home rose by £1,474 last month. It means the annual rate of price growth, which had fallen since the spring, is climbing again and stands at 16.1%. The average UK house price-tag now stands at £131,947, more than £18,000 higher than a year ago.

"This latest, relatively rapid, rise in prices combined with a record level of house purchase approvals in September (£17.3bn) indicates that some strength has returned to the housing market," Alex Bannister, Nationwide's group economist said. Even the London market, which bore the brunt of a slowdown this year, has picked up a little.

However, it is trading up by existing homeowners that is driving the market; the number of first-time buyers remains depressed.