Big lender says house price rises unsustainable

House price rises in property hot spots are "certainly unsustainable", the UK's second largest lender warned yesterday as it said prices surged in March at their fastest pace since the Eighties boom.

The average cost of a home was £79,393 - a 16.2 per cent surge over the last 12 months. This is the fastest annual inflation since the spring of 1989. Between February and March it rose £2,321 or 2.3 per cent - the equivalent of £77 a day.

David Parry, Nationwide's planning director, said certain rises in pockets of the country, especially London, might already be above their long-term sustainable trend. "The current rate of house price inflation is certainly unsustainable for a prolonged period," he said.

The most recent regional picture from Nationwide showed prices rose 21.5 per cent in the capital last year and the next survey, out on April 11, is expected to show further acceleration. Mr Parry warned homebuyers not to borrow beyond their means, echoing recent comments by Howard Davies, the head of the Financial Services Authority. "History suggests that homebuyers should take a cautious view about their borrowing, particularly in a buoyant market, and this remains the case," Mr Parry said.

He said there were risks in the longer-term outlook for the market, saying that the booms of 1972-74, 1978-80 and 1983-89 ended once house prices went above trend. Nationwide figures show prices are now above the long-term trend for the first time since 1991.

The Nationwide criticised the Government for putting up stamp duty and abolishing mortgage interest relief, which it said would make it harder and more costly for people to move without dampening house price inflation. Last month's £2,321 is almost double the extra £1,250 in stamp duty on a £250,000 home from the 0.5 per cent rise in duty - meaning homeowners need only wait a fortnight to pay the extra duty on their next home.

Yesterday's figure will fuel calls for the Bank of England to raise interest rates again to dampen down demand. Mr Parry urged the Monetary Policy Committee to hold fire, saying it would be a "blow to homeowners".

Michael Saunders, an economist with Salomon Smith Barney, said 16 per cent inflation contrasted sharply with the Bank's forecast of 9-10 per cent by year-end. "Rapid gains in house prices are part of a general picture whereby GDP and domestic demand are clearly stronger than the MPC expected," he said. "Base rates are likely to rise again soon."