UK house price growth 'past peak'

House price growth is set to fall by more than half this year

UK house prices grew more quickly last year than at any time since the property market boom of 1988, according to the country's leading mortgage lender Nationwide.

And while the company expects house price growth to slow in 2002, it is ruling out a recurrence of the property market crash of 1989-90, when many homeowners were left paying off mortgages greater than the value of their houses.

House price growth by region, 2001

East Anglia 18.5%

London 14.5%

South East 15.8%

Northern Ireland 3.5%

UK average 13.8%

According to Nationwide's review of 2001, the price of the average house jumped by 13.8% over the year as a whole, posting an increase of 1.9% in December alone.

But the property market is expected to cool in 2002, with house price inflation dropping to just 6%.

Strong economy

Analysts attribute last year's double-digit house price growth to a series interest rate cuts which reduced the cost of borrowing to a 40-year low.

"The key has been a benign economic backdrop, with the lowest unemployment since 1975, the lowest mortgage rates since the fifties, and the fastest growth in real take home pay since 1988," said Nationwide's chief economist Alex Bannister.

In our mind this ensures that the Monetary Policy Committee will not cut interest rates at next week's meeting

John Butler, economist HSBC

However, rising unemployment is expected to dent consumers' confidence in the first half of next year, reducing their willingness to borrow.

This would reduce demand from first-time buyers, and make existing homeowners less likely to 'trade up' to bigger or more desirable houses, Nationwide said.

Rate cuts postponed?

Some analysts said the high rate of house price inflation in December will deter the Bank of England's Monetary Policy Committee from cutting interest rates again until there is firm evidence of a slowdown.

"In our mind this ensures the Monetary Policy Committee will not cut interest rates at next week's meeting," said John Butler, economist at HSBC.

The MPC is due to vote on whether or not to change UK interest rates at the end of a two-day meeting starting on 9 January.

Last year, it cut the cost of borrowing seven times to just 4% in a bid to stave off recession.

Broad-based boom

Unlike previous housing market booms, which were limited to London and the south-east, last year's surge in prices was more evenly spread across the UK, Nationwide said.

House prices grew by 10% or more last year in all regions except Scotland and Northern Ireland, adding around £11,000 to the average homeowner's equity.

Mr Bannister added that the UK housing market remained surprisingly firm last year despite confidence-eroding developments such as the 11 September attacks and the foot and mouth epidemic.