29 July 2004, 12:00  UK house prices back on the boil in July - Nationwide

British house prices came back to the boil in July, marking their biggest year-on-year gains since May 2003, a report said on Thursday, reinforcing expectations for a Bank of England interest rate hike next week. The Nationwide Building Society said house prices soared 2.1 percent in July, the biggest monthly gain since February, and were up a hefty 20.3 percent compared with a year earlier. The figures, which defied expectations of a slowdown, are sure to be of concern to the BoE, which is keen to cool house price inflation gradually with interest rate rises given the potential damage that a crash could do to the economy. The data are likely to cement even further already solid expectations for a quarter-point hike in the base rate to 4.75 percent next week after four such rises since November. "This is a big increase," said Ross Walker, an economist at RBS Financial Markets. "It's a signal that we are going to need more rate rises and the next one is going to come next week." Short sterling interest rate futures fell sharply across the strip while the pound gained as much as a third of a cent against the dollar to trade near $1.8265 on expectations of higher rates.
The sudden gains in July followed a month of slower -- but still strong -- growth in June and some tentative evidence from other surveys that the housing market may have finally begun responding to higher interest rates. But Nationwide flatly said that was not the case. "Whilst recent anecdotal and survey evidence have suggested the housing market might be starting to slow, our own house price data accords with the recent strength of retail sales and mortgage lending," Nationwide economist Alex Bannister said. UK mortgage lending hit a record last month since comparable records began in 1997, according to data published this week from the British Bankers' Association. Figures from the BoE later on Thursday are expected to show that Britons have piled up over 1 trillion pounds in debt -- partly due to ever-larger mortgages to finance soaring house prices.
TOO MUCH LEVERAGE?
On Thursday BoE chief economist Charlie Bean warned that house prices in Britain are overvalued and there could be a sharp correction but said that equally prices could just stagnate for a while. In the meantime, the re-acceleration in house price inflation in July brought the average price of a home in Britain to 154,299 pounds in July compared with 151,524 pounds in June. That compares with an average salary of about 26,000 pounds. Nationwide said it had become increasingly difficult for first-time buyers to get onto the property market without putting down huge deposits or taking out very large mortgages. The number of first-time buyers has fallen sharply, the report said, with 18- to 30-year-olds now making up only 20 percent of first-time buyers. One quarter of those are putting down more than 30,000 pounds as a deposit when they buy property. "The rapid rise in deposit size supports the anecdotal evidence that many first-time buyers are now only able to get onto the property ladder with financial help from their families. In many cases this is likely to involve parents withdrawing equity on their own property," said Bannister. Nationwide said it would probably put its full-year forecast for 15 percent house price inflation under review over the next couple of months given that prices are already up 12 percent on the year. Regional house price inflation trends remain intact, with the biggest gains in Scotland, the North and Wales. Prices in the South and in Greater London have seen a modest reacceleration in price gains, the report said.///

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