Money: Interest-rate warning as house prices near record

House prices are a whisker away from regaining their 1989 peak and consumers took out more than pounds 1bn in new loans last month. Diane Coyle, Economics Editor, reports on new signs of life in the consumer boom, raising the spectre of a further rise in interest rates.

The price of the average house sold in September was pounds 61,334 - the Nationwide building society reported yesterday - approaching the pounds 62,782 peak reached in late 1989.

House prices increased by 1.7 per cent during the month, taking them to a level 12.9 per cent higher than September 1996. Although well below the 30 per cent-plus inflation seen during the late 1980s boom, this was the highest rate since the beginning of 1989.

The Nationwide was careful to emphasise yesterday that there is no boom in the housing market. Paul Sanderson, head of research, said: "The apparent strength of house prices, up by at least 1 per cent every month since May, is largely a reflection of continuing lack of supply in a thin market."

It could give a misleading impression, he warned. There were not enough properties for sale in many areas, and the number of property transactions had fallen.

However, Mr Sanderson admitted that higher prices were starting to change buying patterns, especially in London. "First-time buyers are finding it more difficult to leapfrog the cheapest properties, which is beginning to support prices at the lower end of the market as demand filters down," he said.

The Nationwide's house price figures have been far more buoyant in recent months than the alternative index from the Halifax, due out today. The Halifax is likely to report annual house price inflation of only around 7 per cent; and it insists there is no housing boom.

But separate figures from the Bank of England yesterday suggested that increased consumer borrowing was making up for any patchiness of the housing market. Although total mortgage lending fell slightly to pounds 2.1bn in August, leaving its annual growth the same as the previous month, there was an increase of more than pounds 1bn in consumer credit.

The increase was more than twice as big as July's. The figure came as a setback to experts who had hoped consumer spending might be settling down to a sustainable pace following the boost earlier in the summer from free Woolwich and Halifax shares.

Lending for house purchases last month remained much higher than a year earlier, at pounds 2.1bn compared to pounds 1.7bn. Michael Coogan, director general of the Council of Mortgage Lenders, said a slight slowdown during the summer should have come as no surprise given the mortgage rate increases since May. City experts said mortgage lending was growing steadily.

Consumer credit, the other main component of personal borrowing, rebounded in August. A sharp fall to just over pounds 500m in July seems to have been the result of people using their windfall shares to pay off debts, with borrowing subsequently returning to its earlier, buoyant pace.

It follows statistics last week which showed that incomes after tax and inflation rose by more during the April-to-June period than any single quarter since 1979 - and that was before the windfall shares were added in. Earnings expanded more than 4 per cent faster than the rate of inflation.

"This provides yet more evidence of the need for another rise in interest rates in November," said Mark Wall of investment bank Deutsche Morgan Grenfell, voicing a reaction widespread in the City.

The Bank of England's monetary policy committee meets next week, but most City experts think it will postpone a decision to raise rates for the fifth time since the election until its has firm evidence that the economy is still expanding at an inflationary pace.