Biggest-ever rise in house prices

Britain's biggest mortgage lender has recorded its largest monthly rise in house prices, taking the annual rate of growth to 18.5 per cent and fuelling speculation that interest rates must now rise to choke off the boom.

Figures from Halifax showed that prices in May jumped by 4.2 per cent, the highest monthly leap since the bank started collating the data in 1983. The previous biggest increase was 4.1 per cent in July 1988, when the boom inspired by Nigel Lawson was in full swing.

With the average UK home now worth £107,152, Halifax's economists said the continued rise was being fuelled by low interest rates, low unemployment and a lack of quality properties coming on to the market. But some economists expressed concern about an unsustainable bubble and accused the Bank of England of "losing control of the housing market".

Halifax's figures, which follow equally bullish figures from the Nationwide Building Society last week, will increase the pressure on the Bank of England's Monetary Policy Committee to raise rates when its monthly meeting starts tomorrow. Economists have been predicting that rates would stay unchanged at 4 per cent.

Martin Ellis, Halifax's group economist, said: "It is clear that house prices will not slow as quickly as we predicted earlier in the year. Probable interest rate increases in the next few months should ease the pace of future growth, however."

Halifax attempted to downplay comparisons with the Eighties house price boom, when huge rises were followed by a collapse in prices as interest rates doubled in 18 months. A spokesman said: "The market was totally different then. The reason for the rise this time is the lack of quality properties coming on the market combined with strong demand."

However, some economists said the warning lights were flashing and the Bank of England should act immediately. Richard Jeffrey, chief economist at Bridgewell Securities, said: "It is quite clear that the MPC has lost control of the housing market. Interest rates are too low for equilibrium to be maintained. They should raise rates immediately."

Mr Jeffrey warned: "We may well be beyond the point of no return" and said an unsustainable boom could turn into an inevitable bust. He added that the MPC should impose three or four rate rises to take borrowing levels closer to 6 per cent. The Halifax was more cautious, predicting base rates of 4.5 per cent by the end of the year and 5 per cent by next spring or summer.

Halifax said the market should level out later this year due to a combination of interest-rate rises and an increase in supply. It pointed out that 750,000 homes were empty and that the Government was exploring ways of making them available.

However, it admitted that there were "issues" for first-time buyers in London and the South-east. Despite this, Halifax said that the ratio of house prices in relation to average earnings was now 3.7 per cent, well below its peak of 5 per cent and only a little above its long-term historical average. "This demonstrates that owning a home remains an affordable proposition for most people in most parts of the country," Mr Ellis said.

House prices rises have been boosted by other factors such as the weak performance of investment alternatives such as the stock market. This has fuelled a huge rise in the "buy-to-let" market, where homes are bought and then let out for rental income. But recent figures showed the first fall in rents for two years, prompting warnings that the bubble was about to burst.

Last month the Bank of England said homeowners took on £5.66bn of new mortgage debt in April, the largest amount of extra debt taken on since the bank started collecting the figures nine years ago. Last week Nationwide reported a 2.1 per cent increase in house prices during May, taking the annual growth rate to 17.9 per cent.