Housing market set to boom this summer

BRITAIN'S housing market is set to boom this summer, according to an authoritative new study, a development which could force the Chancellor to hike taxes ahead of the next election.

The latest report from the Ernst & Young ITEM Club, the only independent forecasting group to use the Treasury's economic model, forecasts an 8.5 per cent increase in house prices this year.

Housing turnover is set to rise modestly, and the ITEM club warns that Gordon Brown may have to take steps to dampen activity if a 1980s-style boom-and-bust is to be avoided.

With mortgage interest tax relief due to be abolished next year and interest rates determined by the Bank of England, the Chancellor could be forced to increase stamp duty or council tax to slow the housing market.

Peter Spencer, ITEM economic adviser, said: "It's a nationwide expansion. If you go back to the reasons why the housing market has been held back - high interest rates, job insecurity, worries about a market crash - these factors are now being reversed."

According to ITEM, the buoyant property market and the recent bounce- back in retail spending should ensure the economy steers clear of recession this year.

The economy is predicted to grow by just over 0.5 per cent in 1999 - significantly less than the government's official forecast of 1 to 1.5 per cent growth - and by 1.5 per cent in 2000. Post 2000, the economy should pick-up rapidly, ITEM says, with growth rates of 3.3 per cent in 2001 and 3.5 per cent in 2002.

The ITEM study holds little good news for industry. Manufacturers are forecast to face another painful 12 months amid rising raw material prices and slow economic growth throughout much of mainland Europe.

However, a surging services economy means the Monetary Policy Committee is likely to hold fire on rates throughout much of the summer.

Merrill Lynch's "Survey of surveys", also out yesterday, highlights the continued recovery in UK business confidence and the benign outlook for inflation.