House prices to rise by 8%

The relentless surge in prices has pushed mortgage lending to record levels as potential home owners borrow to the hilt to try to keep up.

And the boom is expected to continue despite the raft of interest rate rises which have seen the cost of borrowing go up from 4.5 to 5.5 per cent in just 10 months.

Britain’s biggest building society Nationwide yesterday revealed that it has nearly doubled its mortgage lending in the past year to £10.6billion – a staggering 92.7 per cent year-on-year rise.

And it said it expects even higher borrowing figures in the future, predicting house price rises of up to eight per cent this year.

Graham Beale, Nationwide’s chief executive, said: “We expect the housing market to remain fairly strong this year.

“Strong demand from buy-to-let investors has supported housing demand and the under-supply of housing, especially in the South-east of England, will continue to be a supportive factor.

“Our forecast for house price growth is five to eight per cent in 2007, reflecting a cooling in the second half of the year in response to increases in interest rates.”

Home owners are already braced for another quarter point rise to 5.75 per cent, which experts think could come as early as next month.

But the rises do not seem to be curbing people’s desperate desire to acquire property. And they are stretching their mortgage finances to the limit.

Figures show that mortgage arrears have started to increase as families struggle to cope.

Home owners have seen hundreds of pounds added to their monthly mortgage payments as interest rates now stand at their highest level for six years.

Nationwide also revealed a 40 per cent rise in unsecured lending arrears across personal loans and credit cards last year as the group saw more borrowers struggle with repayments.

Nationwide now turns down three in every five unsecured borrowers in an attempt to cut bad debts.

Mr Beale said: “We are being much more careful about the business we’re bringing on to the balance sheet.”

In its monthly survey of the housing sector, the Royal Institution of Chartered Surveyors said prices have now risen for 18 consecutive months.

There were higher prices in every region in April, even though supply rose and demand appeared to fall. In England, price rises were driven by London and East Anglia. There were also strong price rises during the month in Scotland and Northern Ireland.

RICS spokesman Ian Perry said: “Last week’s interest rate rise may not be the last as the housing market has not slowed as quickly as expected given the initial round of rate rises.

“With prices buoyant and conditions still tight another rate rise later in the summer looks likely.”

But Miles Shipside, of property website Rightmove, said: “There are signs that the rises are influencing sellers’ asking prices.

“Average prices showed their smallest rise of the year in our latest research. That’s surprising given that we are at the peak of the spring marketing season.”

Annual price inflation for the average home remains in double digits, according to the Department for Communities and Local Govern­ment. That has forced the average price up by £20,000 in the last 12 months.

The latest Government report reveals that house prices rose by 1.1 per cent in March, taking the cost of an average home to £206,890.

Average prices in Wales and Scotland were £161,191 and £151,468 respectively. Nationwide, which is merging with Portman in the UK’s biggest building society tie-up, said the four rate rises since last August were having some impact and might cause some cooling of the market in the second half of the year. But it said the overall trend for increasing prices would continue.

Nationwide reported 17 per cent growth in pre-tax profits to £652million for the year to April 4, boosted by the continued strength in lending, alongside good performance in its current account and credit card offerings. Taking in its buy-to-let and self-certification mortgages, it pushed total residential lending up to £11.2billion.

That gives the group a 10.1 per cent share of the market, securing its place as Britain’s fourth biggest mortgage lender.

The merger with Portman will propel the society to second place behind HBOS when it goes through at the end of August. The enlarged group will have combined assets of more than £160billion.

But jobs are set to go as a result of the deal, with up to 900 redundancies expected over two years.

Mr Beale said: “While our mortgage lending has increased significantly, it has been built on solid foundations as we are a very prudent lender and we make sure we do not lend people money they cannot afford to repay.

“Over the years we have had the best portfolio in the market.”