Rate rise on agenda as bricks and mortar booms

The British housing market fizzed and popped last week amid evidence of record mortgage equity withdrawal and soaring prices.

The British housing market fizzed and popped last week amid evidence of record mortgage equity withdrawal and soaring prices.

First off the blocks, Nationwide building society announced on Tuesday that it had revised its forecasts for house price growth in 2004 up from 9 per cent to 15 per cent.

It added that the average UK property now cost £142,584, nearly a fifth more expensive than at the same time last year.

Three days later, the Halifax, the UK's biggest mortgage lender, said house prices had jumped by 2.2 per cent in March alone and calculated that the average property price was closer to £151,467.

Both sets of figures are likely to increase pressure on the Bank of England to raise interest rates and cool the market.

The Bank's Monetary Policy Committee (MPC) will meet on Thursday to decide if any change should be made to the current base rate of 4 per cent.

In February, the MPC panel raised rates by a quarter point following an increase of the same amount in November.

One advocate of another rise is Simon Rubinsohn, the chief economist at broker Gerrard, who points to the signs of heavy property-linked spending emerging from the Bank of England's figures. During the last three months of 2003, some £16bn of equity was released from the rise in value of our homes via remortgage deals, the figures revealed.

Mr Rubinsohn points out that not only was this a record sum, it was the biggest amount in relative terms.

"At the height of the previous boom, homeowners never withdrew more than 7.7 per cent of disposable income in a single quarter," he says.

"These latest figures show that 8.3 per cent of disposable income was extracted from property in the final part of last year - and provide further justification for the MPC raising base rates."

Other statistics tell a similar story. A further report from the Halifax last week found that the value of the UK's residential housing stock had hit £3 trillion (£3,000bn) in 2003 - nearly double the level of five years ago.

Tim Crawford, the Halifax's group economist, said that surging prices in the north of England, Wales and Scotland in particular had fuelled this rise.

Amid the hubbub, some lenders have moved to offer longer-term fixed-rate products designed to bring a greater degree of stability to the market - despite their muted appeal to homebuyers so far.

Abbey launched a 15-year fixed-rate mortgage at 5.74 per cent last week, while the Co-op bank offered a 10-year fixed rate at 5.69 per cent.

"Although there has been a limited appetite for these mortgages so far, recent increases in the Bank of England base rate and predictions of more rises to come this year, mean that more people are looking for longer-term security," says Angus Porter, the director of customers at Abbey.

David Bitner, the head of product operations at independent financial adviser The MarketPlace at Bradford & Bingley, suggests more such fixes will appear on the market because of concerns about interest rates and the suggestion in the Government-commissioned Miles report that longer tie-ins offer greater stability to the UK housing market.

But he warns that consumers will still find it hard to give up on cheaper, short-term fixed rates and discounted variable rates.

"We will see more longer-term fixed products coming out, but with the differentials between a 4 per cent rate on a variable-rate discount and nearly 6 per cent on a long fixed rate, people will go where they can get a better deal."