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Last Updated: Thursday, 31 May 2007, 08:03 GMT 09:03 UK
Rate rise 'to cool house market'
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Nationwide warned buyers not to over-stretch themselves
The latest rise in UK rates is set to cool housing activity, the Nationwide has said, although annual price growth remained "resilient" during May.

Nationwide's latest survey said annual house price inflation stood at 10.3% in May after a 0.5% increase in the month.

But the high inflation figure was mainly down to slower price growth a year ago, the building society said.

It added the underlying trend was still slowing and warned buyers not to over-stretch themselves financially.

"Higher interest rates, with the threat of more on the horizon, should signal caution to those thinking about stretching themselves to get a foot on the ladder," the society said.

The price of an average house now stands at 181,584, Nationwide said.

'Measured cooling'

Earlier this month, the Bank of England raised UK interest rates by a quarter of a percentage point to 5.5% - the fourth rate rise since August last year.

House price graph

The Nationwide said this latest rise would cool both activity and price growth in the housing market.

The 0.5% rise in house prices during May was down from April's increase of 0.9%.

Meanwhile, the three-month on three-month growth rate - which is often seen as a good indicator of underlying trends - fell to 1.8% in May, its lowest level since August 2006.

Nationwide said that it expected a further rise in interest rates to 5.75% later this year as the Bank of England sought to counter inflationary pressures.

While higher rates "clearly present risks" to the housing market, Nationwide added that the sector should see a "measured cooling" as long as the economy remained in good shape.

Lack of supply

Nationwide said that the underlying picture for prices was showing "a clear downward trend as the effect of earlier increases in interest rates takes hold".

Recently, there has been a drop-off in mortgage approvals and inquiries from new buyers to estate agents.

But so far both the Nationwide survey, and those of other market commentators, have continued to show prices rising steadily with little obvious sign of a slowdown in the pace of increase.

On Wednesday, the latest monthly survey from the English and Welsh Land Registry said prices rose twice as fast in April as they did a year ago.

Analysts said that the lack of properties for sale would continue to support prices.

"Despite slowing demand, house prices still seem likely to lose buoyancy only gradually as a general shortage of property means that pricing power is currently still in favour of the vendor," said Howard Archer, chief UK and European economist at Global Insight.

"This is particularly true in London and the South East, where prices are being fuelled by elevated City bonuses and strong foreign demand, as well as an acute shortage of supply."

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