UK house prices are growing at their fastest annual rate in 13 years despite the recent stock market slump, according to Britain's biggest building society Nationwide.

While the price of equities and goods on the high street both fell in the last month, property prices continued to rise strongly

Alex Bannister, Nationwide chief economist

House prices rose by 21% in the year to July, the biggest annual increase since the second quarter of 1989, Nationwide said on Thursday.

The Nationwide report will help to allay fears that a recent sharp fall in share prices would make consumers less willing to borrow, sapping demand for residential property.

The building society said the sustained rise in house prices had helped to offset the impact of the stock market decline on household wealth, helping to shore up consumer confidence.

Lost a third

"While the prices of equities and goods on the high street both fell in the last month, property prices continued to rise strongly," said Alex Bannister, Nationwide's chief economist.

"It is ... likely that a majority of households track the value of their home more closely than that of their pension fund, and so the impact on their current borrowing and spending decisions may not be too negative."

UK shares have lost about a third of their value so far this year, eroding the value of pensions and other savings.

Nationwide added that while the monthly rate of house price inflation slowed from 3.3% in June to 2.2% in July, this is unlikely to herald the beginning of a downturn.

Despite the latest data for June...it is far from clear that this is the beginning of a sustained downturn

Alex Bannister

The company said the increase for July remained above the average 2.1% rise over the last six months.

And while mortgage lending slowed in June, this probably reflected the impact of extra public holidays and the distraction of the World Cup finals.

"Despite the latest data, for June, showing mortgage lending and house sales declining sharply it is far from clear that this is the beginning of a sustained downturn," said Mr Bannister.

Vulnerable

Nationwide said that while higher interest rates and slower income growth are likely to slow house price inflation in the months ahead, the probability of a downturn is slim.

It said that with inflation remaining low, the Bank of England still has scope to cut interest rates in order to shore up consumer confidence in the even of a further sharp fall in share prices.

However, Nationwide warned that the London property market is more vulnerable to the stock market slump, which has sharply reduced lucrative City bonuses.

It said the slump in share prices had already contributed to a "significant" weakening of the upper end of the housing market in the capital.

Repossession figures

The Council of Mortgage Lenders announced on Wednesday that reported arrears and repossessions had fallen to a near 20-year low.

It said low interest rates, high employment and rising property prices meant people who got into difficulties with their payments were able to sell their home and pay off their debt.

During the first six months of 2002 the number of properties taken into possession fell to 6,850.

This is the lowest level since 1984 and well down on a high of almost 39,000 in 1991.

Urging caution

But Director general Michael Coogan urged caution.

He said: "The current volatility of the stock market makes the economic outlook more uncertain.

"Borrowers have enjoyed a long period of continuing improvement in arrears and possessions, which has been extended by low mortgage rates.

"But the trend could be reversed if we have rising unemployment in the next 12 months."

Borrowers were prone to exaggerate their ability to pay their mortgage if they lost their job, he said.

People who took out their mortgage after 1995 will not get any state help for the first nine months, under new procedures.