London leads the way as house prices continue to boom

Britain's housing market is entering the key spring sales season in rude health thanks to spiralling property prices in London's suburbs, according to a report out today.

Hometrack, the housing information business, said the average price of a UK home rose by 0.8 per cent in March, pushing the annual rate of increase up to 6.7 per cent, the fastest since June 2003.

Richard Donnell, Hometrack's director of research, said prices were driven by big gains in London, where a lack of properties for sale combined with strong competition from buyers resulted in prices rising across more than 80 per cent of postcodes during March. On average, they shot up by 1.8 per cent, the biggest monthly increase in the capital for more than four years. In the rest of the country, growth was much more subdued.

"What we are seeing is a ripple effect," Mr Donnell said. "Last year, levels of house price growth were being driven by the high value, prime housing markets in central London. However, looking at the first three months of this year, house price growth has picked up in London's suburbs where demand is being driven by the need for family housing." Over the past month, the biggest price increases were seen in Sutton (3.5 per cent), Merton (3 per cent) and Brent (2.4 per cent). London's strong performance has also had a knock-on effect on commuter areas including Berkshire, Kent and Suffolk.

The news is bound to stoke expectations the Bank of England will raise interest rates again in the next few months. A Reuters poll of 60 economists found 11 expect rates to rise by a quarter-point to 5.5 per cent at the Monetary Policy Committee's next meeting on 5 April; 35 said May was the most likely month.

The MPC will have to grapple with a slew of data, much of it conflicting, before making its next decision. According to the Office for National Statistics, 2007 started sluggishly and rebounded in February, particularly on the high street. In contrast, survey evidence has given no real hint of any slowdown.

"We are at a delicate stage in the interest rate cycle with most of the MPC trying to judge whether the three rate hikes that we have already had are sufficient," said Geoffrey Dicks, chief UK economist at Royal Bank of Scotland. "If we look through the statistical fog, we get to an economy that is still expanding at something close to trend."

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