Rate rises and high lending take toll on property market

House prices rose again last month, Britain's biggest building society said yesterday, but there are mounting signs the market is finally cooling in response to stretched affordability and higher interest rates.

Nationwide said the average price of a UK home rose by 0.5 per cent in May, pushing the year-on-year rate of increase up from 10.2 to 10.3 per cent. The price of a typical house now stands at £181,584, almost £17,000 higher than a year ago. However, the three-month on three-month growth rate eased to 1.8 per cent. Nationwide said a further weakening could be expected in the months ahead.

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Separate data from the Bank of England added to evidence that the market is coming off the boil. Mortgage lending rose by £8.9bn in April, down from £9.4bn in March - the smallest increase for seven months. New mortgage approvals - loans agreed but not yet made and a good forward-looking indicator - totalled 107,000, the lowest for a year.

With prices soaring to dangerous levels, some warned the market is heading for a Nineties-style crash. But Fionnuala Earley, Nationwide's chief economist, said: "We now expect there is a strong chance that [interest] rates will be increased once more this year, to 5.75 per cent. Higher rates clearly present risks to the housing market, but providing the economy, and particularly the labour market, remain in good shape, we should still be able to expect a measured cooling.

She also issued a warning to first-time buyers. "Higher interest rates, with the threat of more on the horizon, should signal caution to those thinking about stretching themselves to get a foot on the ladder," she said. The four rises since last August have added about £64 to the monthly bill of homeowners with a £100,000 repayment mortgage.

Kelvin Davidson, a property economist at Capital Economics, said: "We have always argued that it would take some time for higher interest rates to have a clear impact on house prices, and the high take-up of fixed-rate loans over the past year or so simply reinforces that view. Even so, we continue to expect falling buyer enquiries, moderating mortgage demand and hints that new sales instructions are picking up to lead to markedly slower house-price growth by the end of the year."

The Bank of England data also revealed a dramatic waning in the appetite for unsecured debt. Consumer credit - borrowing on credit cards, store cards and personal loans - rose by just £498m in April, a 58 per cent fall on last April and the weakest for 10 years.