Levelling off in rates 'could spark fresh house price surge'

House prices could enjoy a new year surge if the Bank of England stops raising interest rates, the body that represents the mortgage industry said yesterday.

House prices could enjoy a new year surge if the Bank of England stops raising interest rates, the body that represents the mortgage industry said yesterday.

The Council of Mortgage Lenders (CML) said it was too early to call the turn in the housing market despite the welter of evidence pointing to a slowdown. Its comments came as the Bank left the base rate on hold at 4.75 per cent yesterday, prompting some analysts to say the next move in rates could be down.

In its monthly assessment of the economy, the CML said it was worried that analysts who had expected a slowdown in the housing market were reading too much into recent figures.

"Some commentators are already suggesting the boom is over [but] we would urge a note of caution," it said. "Not only is it too early to call but even with continued signs of a cooling in the housing market, there is still the possibility of a renewed surge early next year."

It said the housing market was closely linked to consumer confidence. "The Bank may take its foot off the brake too soon and the strong economic fundamentals, coupled with lower-than-expected interest rates, may engender a revival in confidence and drive the market forward."

The CML said many potential first-time buyers who had been put off because of a possible crash could return to the market if conditions became more favourable. There is a danger that the expectation of modest interest rates may itself act to encourage a renewed pickup in the housing market, it said.

It is the second time recently that the CML has taken a "hawkish" view that might not be shared by its members. Last year its director general, Michael Coogan, stunned the industry by calling on the Bank to raise interest rates.

Yesterday's decision by the Bank's Monetary Policy Committee (MPC) was unanimously predicted by City economists in the light of the slowdown in the housing market. Halifax last week reported a 0.6 per cent fall in prices in August, estate agents have reported a slump in activity and new mortgage lending suffered a record fall in July.

The market is now focused on the timing of the next rise, with several analysts saying the Bank would act in November - the month of its new economic forecasts - to quell inflationary pressures.

"The housing market is not the MPC's sole concern," said Roger Bootle, the chief economic adviser to the accountants Deloitte, who pencilled in rises in November and February. "It is also worried about the inflationary impact of the strength of economic activity."

Philip Shaw, the chief UK economist at Investec, said developments in the market held the key to the short-term path for rates. "In the absence of a sudden upturn we find it difficult to see the MPC increasing borrowing costs this year," he said.