Ana Nicolaci da Costa and David Milliken London

UK house prices rose last month at their fastest rate in nine years and London prices jumped the most in a generation, data showed yesterday, as measures to rein in home loans have yet to have an impact.

Stricter checks on borrowers’ ability to pay back mortgages were introduced in April and have weighed on the approval of mortgages.

Some fear these loans could become unaffordable when interest rates eventually rise from a record low.

But house prices picked up pace last month, growing by almost 12 percent on the year, helping to fuel construction.

Separate data yesterday showed activity in the building sector grew in June at its fastest annual pace in four months.

Further measures announced last week to cool lending and reduce the risk of a house price bubble were expected to have minimal impact, as homes were still not being built fast enough, analysts said.

The Bank of England has opted for macroprudential measures to tackle the strength in the housing market and said interest rate rises from the low of 0.5 percent would be a last resort to prevent a bubble for fear that a premature move could derail the recovery.

But economists said the data only strengthened the case for a rate hike this year, after a strong manufacturing release this week also pointed to robust second-quarter growth, and sterling hit a fresh near six-year high against the dollar.

Chris Williamson, the chief economist at Markit, which produced the manufacturing and construction surveys, said: “The strong growth of both sectors should help drive a further robust increase in gross domestic product of a similar magnitude to the 0.7 to 0.8 percent increase seen in previous quarters.


persistent strong growth adds to the chance of interest rates starting to rise later this year.”

The Markit/CIPS purchasing managers’ index for the construction sector rose to 62.6 in June from 60.0 in May.

House prices rose 1 percent during June after a 0.7 percent rise in May, taking the annual rate of increase to 11.8 percent – the biggest since January 2005, according to Nationwide.

More strikingly, in the three months to June, London house prices were 25.8 percent higher than a year earlier – an annual increase not seen since 1987.

“The price of a typical property in London reached the £400 000 (R7 million) mark for the first time, with prices in the capital now around 30 percent above their 2007 highs and more than twice the level prevailing in the rest of the UK,” Nationwide’s chief economist, Robert Gardner, said.

Average house prices outside London were a fraction below their 2007 peak, he said.

The figures underscore the challenge facing the Bank of England as it tries to stop a regional housing boom from destabilising the economy.

The bank has said it wants to prevent lending from getting out of control. It said last week that no more than 15 percent of new mortgages could be to people seeking to borrow more than 4.5 times their annual income.

Nationwide said this cap and new tighter affordability checks were unlikely to slow house price growth in the short run, but that the prospect of higher interest rates might.

Nationwide said the underlying pressure on prices came from a lack of new homes being built – a view shared by the central bank. – Reuters