Rate rise 'did nothing' to cool the housing market

August's rise in interest rates "did nothing" to cool the housing market, Nationwide Building Society said yesterday as it reported a 1.3 per cent monthly jump in prices.

The increase, equivalent to an extra £1,700 on the average price of a home, took the annual rate of house price inflation to a 19-month high of 8.2 per cent.

Analysts said the figures suggested house prices still had further to rise and reinforced expectations the Bank of England might need to raise rates again this year to 5 per cent.

"The market is beginning to boom," Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors, said.

Nationwide said strong demand from buyers and an increasingly reluctance by sellers to put their homes on the market threatened to drive prices up further.

"Just like the weather, the housing market was unseasonably warm in September as August's rate hike did nothing to cool the rate of house price inflation," Fionnuala Earley, its chief economist, said.

She said families were finding ways to overcome the affordability obstacles that had been expected to slow the market. "Many reports suggest that parents and family are increasingly funding deposits for their children. Such a helping hand goes a long way."

Analysts said the strength of the rise would add to the fears at the Bank over inflationary pressures before their decision on interest rates next week.

A poll of economists by Reuters found they gave a one-in-four chance to rate rise next week, although only one out of 50 predicted a move. However, all but two forecast the Bank's Monetary Policy Committee would move in November to coincide with its quarterly inflation forecasts.

Geoffrey Dicks, the chief UK economist at Royal Bank of Scotland, said next month's decision was a "potentially awkward hurdle" for Bank-watchers. "A case for another hike can be made for October though we do not believe it is sufficient to depart from the tried-and-tested three-month timescale," he said.

But there was fresh ammunition for those calling for a pause in rates from figures showing the dominant services sector suffered its sharpest downturn for two years in July. The Office for National Statistics said output of the sector, which makes up three-quarters of the economy, contracted by 0.3 per cent in July, although it stressed the monthly data was volatile.