Surge in house prices fuels fears of debt crisis

The housing market enjoyed another bumper month in September, Nationwide building society was expected to say today. The price of the average home rose by 1 per cent on the month to £130,473, the fifth month in a row that prices have risen by a full percentage point.

The healthy rise will add to a growing consensus among analysts that momentum has returned to the market after the slowdown in the run up to the Iraqi conflict.

The message was reinforced by separate figures from the Bank of England showing that mortgage approvals surged in August. "It is clear that some momentum has now returned to the market," Alex Bannister, its chief economist will say.

"Some of this relative strength may reflect buyers choosing now to enter the market or trade up, having been put off earlier in the year because of uncertainty in the run up to the war in Iraq and the significant amount of comment about an impending housing market crash."

It echoes a similar survey at the weekend by Hometrack, a property website, which found prices rose in September at the fastest pace for six months.

Yesterday, the Bank of England said mortgage approvals jumped from 112,000 in July to 120,000 in August, the highest level since October last year. Total lending to individuals rose by £9.3bn in August, a 13.9 per cent in the 12 months to August, the same rate as in the year to July. The rise in credit secured on dwellings was also the same in the 12 months to August, at 13.9 per cent, as in the year to July.

However, total lending secured on dwellings slowed slightly, posting a rise of £7.7bn, compared with £8.2bn in July. Consumer credit rose £1.58bn compared with £1.51bn.

Vicky Redwood, a UK economist at Capital Economics, said: "These figures will do little to calm fears that the strength of household borrowing means that consumers are continuing to raise their debts to unsustainable levels. The implication [is] that the danger is increasing that households are setting themselves up for an abrupt adjustment."

However, others were encouraged by the gentle slowdown in mortgage borrowing. Ciaran Barr, the chief UK economist at Deutsche Bank, said: "Demand for household borrowing is high, but stable."

The Nationwide data will also point towards a slowdown with the annual pace of growth down to 15.5 per cent, the lowest for 18 months.

Last month the society raised its growth forecast for the year to 13 per cent - almost half of 2002's boom figure.

These are the first borrowing figures to be reported since the Bank published research showing that the house price boom could lead to more families plunging deeper into debt over five to 10 years.

Analysts said the Bank was clearly focusing greater attention on debt levels but believed yesterday's figures would not be enough to prompt a rise in interest rates next week.