Economists expressed concern yesterday about the potential effects on inflation as growing numbers of property owners remortgage to release some of the equity in their homes and then spend the money on consumer goods.
This practice is fuelled by growing confidence that property prices will continue to rise.A survey from the Consumers' Association today shows the number of people expecting their house to rise in value by more than 5 per cent rose to 36 per cent from 22 per cent in April and June. The optimism is bolstered by cheap borrowing costs and a recovering economy. The Bank of England's main interest rate, at 5 per cent, is the lowest since 1977.
Recent house price surveys by lenders have confirmed the strength of the housing market. The Halifax says prices rose 2.6 per cent in the three months to June - the highest since 1989 - while Nationwide Building Society says house price inflation is running at 7.5 per cent.
Deutsche Bank has raised its forecast for house price inflation this year to 8.5 per cent from 5.5 per cent and for 2000 to 7.5 per cent from 7 per cent.
Ciaran Barr, the bank's senior UK economist, said: "We believe the risks to these forecasts are to the upside. This will keep the pressure on the Bank to [raise] rates in early 2000."
He said there was "too much borrowing chasing too few houses", adding: "Recent sharp price rises are acting as a classic rationing mechanism to limit demand ... but the rise in prices will attract new properties on to the market."
Mortgage lenders were anxious yesterday to play down suggestions of a housing boom, stressing that demand in some areas of the country is flat. Their council said remortgaging - people shopping around for a better deal - was increasing as a proportion of total lending while the rise in lending for new purchases was "modest". Michael Coogan, the council's director, said: "There is little evidence of a `classic' housing boom developing, with the aggregate figures masking significant variations in local economic and housing market conditions."
But City economists warned that the booming market threatened to derail the Bank of England's hopes of controlling inflation and could lead to higher interest rates next year.
The investment bank Goldman Sachs said households were increasingly using windfalls from the rising value of their homes as collateral to raise cheap loans in a process known as "equity withdrawal". David Walton, an economist, said: "If the recent rapid increase in mortgage commitments is a precursor to a large rise in equity withdrawal, consumer spending could easily pick up and be sustained at a 4 per cent rate." He said the market posed no immediate threat to the inflation outlook as real-term property prices were still 25 per cent below the peak of 1989, but added: "Clearly there is plenty of scope for the housing market to hot up even more in coming months."
Gordon Brown, the Chancelloris concerned that many lenders cut rates by only 0.15 points when the Bank cut the base rate by 0.5 points.Yesterday the Treasury unveiled a consultation document on whether there should be statutory regulation of advice on the marketing of mortgages.