Interest rate rise looming after house prices pick up

Interest rates look certain to rise next week after Nationwide, Britain's biggest building society, said that increases in house prices accelerated in October, for the first time in seven months.

The rise, reported yesterday, confirms Bank of England figures earlier this week showing that borrowing on mortgages and consumer spending was increasing, despite expectations of a slowdown.

John Butler, an economist at HSBC bank, said: "The resurgence in the housing market - and consumer appetite for debt since July's rate cut - seems to cement a rate hike next week."

And he added: "It will raise fears that rates may need to rise substantially before the consumer cools."

According to Nationwide, the price of a typical house rose by a seasonally adjusted 2 per cent in October. The annual rate of house price inflation rose to 16.1 per cent, up from 15.5 per cent in September. The average house value rose from £130,473 to £131,947. At the start of this year, prices were growing by 27 per cent a year, but this has steadily declined since March.

Alex Bannister, Nationwide's group economist, said: "This latest rise in prices, combined with a record £17.3bn of house purchase approvals in September, indicates that some strength has returned to the housing market.

"Homebuyers appear to have shrugged off slower growth in pay, fears of interest rate rises and speculation of tax increases in next year's budget and remain willing to take on extra debt and some lenders appear to be relaxing criteria to allow this to occur," he added.

The typical mortgage is now 2.9 times income, compared with 2.6 times a year ago, and Nationwide reports a sharp increase in the number of homeowners taking new mortgages of more than 3.5 times their income.

One reason for the continuing high demand for property is the low 3.5 per cent Bank of England base rate. Nationwide says that a typical mortgage borrower is paying just over a quarter of income in monthly repayments. "Base rates would need to rise to around 7 per cent for payments as a proportion of take-home pay to hit the levels seen during the early 1990s," Mr Bannister said.

While many regions have seen price growth slowing down, London house prices are accelerating.

Mr Bannister added: "The turnaround in London appears to have been led by rising equity markets and a recovering corporate sector. In contrast, northern regions are likely to see a more significant reduction in house price inflation as affordability constraints begin to bite."

The Bank of England Monetary Policy Committee meets next Thursday, having decided at its last monthly meeting to hold rates only by a 5-4 vote. An increase would be the first since February 2000.

* The number of people planning to buy a property during the next two years has fallen to 12 per cent from 15 per cent in July, according to Alliance & Leicester. Caution over a potential rise in interest rates had made fixed-rate mortgage products popular, a spokesman said.