Surge in mortgage lending raises spectre of 1980s-style house price boom

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The Bank of England yesterday raised the spectre of a return to the housing boom and bust of the late 1980s as new figures showed mortgage lending had surged to an all-time high.

The Monetary Policy Committee cited the "strength" of the housing market two weeks ago when it decided not to cut interest rates. According to the minutes of the meeting, the MPC said: "It is possible that the housing market could become a source of further concern, if low levels of mortgage interest rates were to prompt a renewed house price boom." The Bank is normally very cautious when discussing housing and industry observers were surprised it had used the "boom" word.

Alex Bannister, chief economist at Nationwide building society, said: "We expect the economy to slow and that will take the shine off consumer confidence. That will be enough to slow growth."

Figures from the mortgage industry showed the volume of new home loans rose to an all-time high in May. The Council of Mortgage Lenders said loans for house purchase surged to an all-time high of £8.1bn in May.

"Buoyant household confidence and spending may mean the MPC's next move in interest rates is upwards," said Michael Coogan, CML director general.

Ian Mulken, chief executive of the British Bankers' Association, which also reported an all-time record amount of mortgage lending, described the mortgage market as "very buoyant".

However, the positive outlook was offset by an unexpected profits warning from Chesterton International, the up-market estate agent. It said there had been a "sharp" downturn at the top end of the London market, sending its shares down 25 per cent. "The uncertainty in the commercial market and the mid to high-price London residential market that developed in April and early May has hardened into a sharp reduction in the volume of transactions completed in May and June," the company said

Chesterton said this had come at a time when it typically earns the "major part" of its profit. It meant that earnings for the year to 30 June were likely to be "substantially" below the £5m reported last year and "significantly" short of forecasts.

Other agents at the top end of the market said they were surprised by the Chesterton statement. Yolande Barnes, head of residential research at Savills, said: "We were expecting a downturn after March but it never happened. I'm amazed at this announcement."