House price boom over as interest rates start to bite

The housing market ground to a halt last month as prices posted their smallest rise since the 2001 terrorist attacks on New York's World Trade Centre, Nationwide building society said.

The housing market ground to a halt last month as prices posted their smallest rise since the 2001 terrorist attacks on New York's World Trade Centre, Nationwide building society said.

The price of the average home rose just 0.1 per cent in August following July's meteoric 2.1 per cent rise.

The news, which came a day after the Bank of England said mortgage lending tumbled in July, will add to fears that rising interest rates could trigger a fall in prices .

"The housing market is on the turn," said Ross Walker, UK economist at Royal Bank of Scotland. "The interest rate medicine appears to be working."

There were similar fears on the other side of the Atlantic as official figures showed house prices surged over the summer at their fastest pace for 25 years.

Nationwide said the five rate hikes since November last year had taken some of the heat out of the market, adding to a traditional summer slowdown.

"Price growth has moderated rather than slumped," said Alex Bannister, its chief economist. "While we don't expect prices to decline, the trend in price growth is expected to remain on a weaker path for the rest of the year."

He said there was mounting evidence that mortgage lending, activity levels and asking prices were all falling.

The society stuck to its forecast for a 15 per cent rise in prices this year - marking a slowdown from the current annualised rate of 18.9 per cent - but warned that buyers faced a host of financial pressures.

Mr Bannister warned that 3 million households on fixed rate deals faced a "payment shock" when they moved onto the higher floating interest rate.

"In addition, the sequence of hikes will have had an important impact on peoples willingness to stretch themselves," he said

The pound fell, dropping below $1.80, as City traders bet that interest rates would fail to hit the peak of 5.75 per cent that markets had priced in just three months ago.

Alan Castle, UK economist at Lehman Brothers said: "We are comfortable with our long-held call that rates have already peaked [at 4.75 per cent]."

However, Richard Donnell, director of research for estate agents FPD Savills, said the market still had life in it, with pockets of affordability across the country.

"If it turns out that rates have peaked at 4.75 per cent then I think we could be seeing double digit house price inflation next year," he said.

Meanwhile fears that the Bank had already gone too far with its tightening policy rose after a separate report revealed an expected slowdown in manufacturing industry.

A closely watched index of UK factory activity by the Chartered Institute of Purchasing & Supply showed an unexpectedly large slowdown in both output and new orders in August.

Paul Dales, UK economist at Capital Economics, said: "This is a warning not to apply the brakes on consumer activity and housing market too hard when other areas of the economy will struggle to fill the hole."

Economists believe the Bank's Monetary Policy Committee will wait until November to raise rates again - but might postpone if the data continue to point to a marked slowdown.

"The chances are rising that the Bank will not raise interest rates again this year," said Howard Archer, UK economist at Global Insight.

Meanwhile, the average US home price rose 9.36 per cent in the second quarter, the largest annual increase since 1979.

Paul Ashworth at Capital Economics said: "Housing looks even more overvalued than before and susceptible to a sharp downward correction."