LONDON: London house prices soared 26


percent over the past year in the biggest annual jump since 1987 as the


economic recovery and record-low interest rates stoked a boom in one of the


world's most expensive property markets.

The rise, shown in a Nationwide


survey on Wednesday, is expected to put pressure on the Bank of England to


bring forward its plans to raise interest rates, a move that would be the first


tightening by a major central bank since the financial crisis hit.

Across Britain, house prices rose at


their fastest rate in over nine years, Nationwide said, while the average


London property hit a record 400,000 pounds, or $681,000 for a dollar buyer


forced to grapple with rocketing prices and the strongest pound in nearly six


years. 

Foreign money has poured into London


property, seen as an attractive bet by everyone from Russian oligarchs to U.S.


technology titans, prompting a domestic scramble for homes that many locals


cannot afford without potentially crippling debt. 

Bank of England Governor Mark Carney


has warned the housing market poses the biggest domestic risk to financial


stability and signalled that Britain could be the first major Western economy


to tighten monetary policy since the 2008 crisis. 

He has also stressed that monetary


policy will not be driven by house prices in its capital - and that the central


bank does not target house prices or seek to use higher interest rates as its


main tool for curbing rising household debt, 

But the latest rises raise questions


about how long this position can stand. 

"The data signal a rapidly


growing economy, one in which house prices are rising very rapidly, employment


is rising very rapidly... and interest rates right now are at a record


low," said Rob Wood, chief UK economist at Berenberg. 

"I think those sort of


indicators mean that it would be sensible to begin the process of gradually


withdrawing the exceptional monetary stimulus this year." 

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, a year best remembered in financial circles for the Black


Monday stock market crash. 

Prices in the British capital are now


around 30 percent above their pre-crisis highs and more than twice the level in


the rest of Britain, said Robert Gardner, chief economist at mortgage lender


Nationwide which collated the data. 

Countrywide, house prices rose 1.0


percent in 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. 

That has helped fuel construction.


Separate data on Wednesday showed activity in that sector grew in June at its


fastest annual pace in four months. Shares in Britain's biggest housebuilders


including Barratt Development , Persimmon , Berkeley


Group and Taylor Wimpey are up between 12 and 20


percent in the last 12 months. 

BUBBLE OR GOLD? 

Stricter checks on borrowers' ability


to pay back mortgages were introduced in April and have weighed on the approval


of home loans. Some fear these could become unaffordable when interest rates


eventually rise from a record low. 

Further measures announced last week


to cool lending and reduce the risk of a bubble were expected to have minimal


impact, and analysts said homes were still not being built fast enough to


contain price rises. 

The BoE has opted for macroprudential


measures to tackle the strength in the housing market and says interest rate


rises from the 0.5 percent reached in March 2009 are only a last resort for


fear that a premature move could derail the recovery. 

Sterling [GBP/] hit a fresh near


6-year high against the U.S. dollar. Over the past 12 months, sterling is up 14


percent against the U.S. dollar. So far this year, sterling has risen 4.5


percent on a trade-weighted basis. 

Further rises in sterling could make


London property, which is already far more expensive than any other European


property market, less attractive to all but the richest dollar buyers, some


analysts said. 

BOE'S CONUNDRUM 

The figures underscore the challenge


facing the Bank of England as it tries to stop a regional housing boom in


London and the southeast from destabilising the rest of the economy. 

Last week it said that no more than


15 percent of new mortgages could be to people seeking to borrow over 4.5 times


their annual income. 

Around 10 percent of loans fall into


this category nationally, rising to roughly 20 percent in London. But


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. 

It added that the underlying pressure


on prices came from a lack of new homes being built - a view shared by the BoE. 

Markit's survey showed construction


activity picked up in June but analysts said it was not enough to tackle


Britain's long-term supply shortage problem. 

The monthly Markit/CIPS purchasing


managers' index (PMI) for the construction sector rose to 62.6 in June from


60.0 in May, its highest level since February. The survey showed the fastest


pace in hiring in the sector since 1997.- Reuters