Fears grow that housing market is 'out of control' as annual price rise hits 18%

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House prices, mortgage borrowing and applications for new loans all rose at their fastest pace since the late 1980s boom according to figures yesterday, triggering warnings that the housing market was "out of control".

The average price of a home leapt 2.1 per cent in May to give an annual rate of 17.9 per cent, the fastest since the peak of the last boom in 1989, Nationwide building society said yesterday.

Alex Bannister, its group economist, said there had been "no slackening" in demand in May after April's all-time record monthly increase. He admitted prices had risen 10 per cent in just five months – the same as it had forecast they would rise over the whole of 2002.

In a significant move, Nationwide has stopped forecasting a slowdown in the market. "I cannot give a firm date for the slowdown to occur," Mr Bannister said. "You would need a shock such as nasty economic news or a nasty rise in interest rates, neither of which is on the cards."

The Bank of England meets next week but most analysts expect it to leave ratesat the 38-year low of 4.0 per cent they have held since November.

Meanwhile the Bank said homeowners took on £5.66bn of new mortgage debt in April, the largest amount of extra debt since the Bank started collecting figures in 1993. Separate figures from the Inland Revenue showed 136,000 property transactions were completed in April, the largest total for a month since the late 1980s.

The welter of record data sent alarm bells ringing in the City of London. Alan Castle, UK economist at Lehman Brothers investment bank, said the figures were "further signs of an out-of-control market".

Michael Saunders at Salomon Smith Barney said: "Whether or not you believe there is a housing bubble it is clear that there is a housing boom and a credit boom."

The sharp fall in mortgage rates over the past 12 months has encouraged people to ignore warnings of a recession and dive into the housing market. Although the ratio of house prices has surged to 1980s levels, low mortgage rates mean households spend a historically low proportion of their income to pay their loan.

Adam Cole, an economist at Credit Agricole in London, said: "In the medium term, house prices increases of this magnitude are clearly unsustainable. But the current combination of earnings and house prices means affordability is ... in line with its long-term average."

Meanwhile the market show few signs of slowing in the coming months. The number of applications for new home loans surged by 15,000 to 127,000 in April. This total, which was another all-time record according to the Bank, is likely to feed through to higher house prices in a few months' time.

Nationwide's Mr Bannister said: "Certainly consumers appear willing to take on higher levels of mortgage debt." He said a sharp rise in unemployment, which would throw homeowners out of work, drive down wages and hit confidence, could rock the housing market.

However, there was little sign of a downturn in confidence. Yesterday's GfK survey showed households' optimism about the state of their finances rose close to an all-time high this month. Meanwhile separate research showed wage deals have picked up. Settlements have averaged 3 per cent since April compared with 2.5 per cent in the first quarter, Incomes Data Services said.

This was driven by the public sector, where most deals were between 3.5 and 4 per cent – a sign extra Government spending is driving up wages. This was much higher than the private sector, where pay rises have ranged this year from a pay freeze to a 10 per cent wage hike.

This included an inflation-busting 8.9 per cent award for 850,000 workers in Britain's booming building and construction industries.

Some analysts are worried a bubble in the buy-to-let market poses a more immediate threat of triggering a slump in prices.

Investors poured into the housing market last year to snap up properties in order to reap a rental income as well as benefiting from the rise in the capital value.

But a fall in rents – the first for two years – prompted a series of warnings from estate agents that the bubble was about to burst.

Analysts fear that as rents fall, investors will find they can no longer cover their mortgage costs and will try to sell their properties, leading to a glut of unsold homes on the market.

However, a recent survey from the Royal Institution of Chartered Surveyors showed there were currently fewer homes for sale than at any time in the past two decades.

"Growing concerns over the buy-to-let market is one source of uncertainty," said Simon Rubinsohn, chief economist at Gerrard brokers. "But the lack of supply of good property should continue to underpin prices."