House prices climbing at 20 per cent

House prices are rising at almost 20 per cent a year, the fastest pace since the boom of the 1980s, Nationwide building society said yesterday.

The society, the UK's fourth- largest mortgage lender, raised its forecast for annual house price inflation this year to 18 from 10 per cent.

But the figures contrasted with a sharp slowdown in manufacturing, highlighting the dilemma the Bank of England faces when it sets interest rates on Thursday.

Nationwide said house prices surged by 3.3 per cent between May and June to leave the average home worth £106,693, a rise of 19.8 per cent over the last 12 months.

Alex Bannister, its group economist, said: "The housing market continues to hold up because of strong economic conditions, notably high employment levels and low mortgage rates.

"But its strong growth in recent months is being driven by high levels of confidence and the expectation prices will rise strongly over the next few years."

With prices rising at an average of £127 a day, yesterday's report will stoke fears of another boom that will end in a crash as it did a decade ago.

Last week the lending industry took the unprecedented step of calling for a hike in interest rates. The Council of Mortgage Lenders said they believed a small rise now would prevent the need for sharper hikes later that could burst the bubble.

Lenders still believe the market will slow as prices become unaffordable but Nationwide said there was little sign of that. "Barring a major economic shock, such as a sharp rise in unemployment or mortgage rates, the housing market is set for continued growth in prices," Mr Bannister said.

Prices accelerated in all parts of the country except London, where growth slowed from 16.0 per cent in the previous quarter to 14.8 per cent. The fastest-growing region was East Anglia with 23.3 per cent, followed by east Midlands with 22.9 per cent.

Homebuyers have rushed to take advantage of the Bank's decision to cut interest rates to a 38-year low of 4 per cent.

The British Bankers' Association said mortgage approvals hit a record level in May. It said 253,900 mortgage loans worth £16.5bn were approved in May, both are the highest since records began in 1997.

But few analysts expect the Bank to raise rates this week. Inflation is below target, retail sales are slowing, the economy is hardly growing and world stock markets have fallen sharply.

Figures yesterday showed manufacturing industry barely grew in June, disappointing forecasts of another strong month. The index from the Chartered Institute of Purchasing and Supply fell to 50.5 where a number over 50 indicates expansion. This marked a drop from 52.7 in May and a two-and-a-half year high of 53.1 in April.