House prices cheer Tories

Heseltine steps out of line

on anti-inflation strategy

Michael Heseltine yesterday defied a key element of the Government's anti-inflation policy - by heralding a boom in house prices as a signal of economic success.

John Major, who was a Treasury minister at the time of the last house- price boom, in the late 1980s, has repeatedly said that he will not allow a re-run of that boom and bust cycle.

House prices have been built into the official counter-inflation strategy, and the Deputy Prime Minister's words could now be used as ammunition by Eddie George, Governor of the Bank of England, who is pressing for a further rise in interest rates to damp down the current consumer spending spree.

Talking up the pre-election feel-good factor, Mr Heseltine told BBC radio: "The British people know they've had a tough time, that the world has had a tough time, in this recent recession. And they've seen a guy, John Major, straight as a dye, gutsy, determined to keep his nerve, and what's happened? Well, don't ask the Conservative Party ... just look at the newspapers today and in the last couple of days: record sales in the shops, housing boom to come.

"We have got the most extraordinary economic circumstances because John Major and his government presided over the conditions which have helped the British people to achieve this remarkable series of events."

Alan Milburn, a Labour Treasury spokesman, said last night: "Here we go again. Hard-pressed home-owners will not forget the pain caused by Tory boom and bust policies.

"The last time ministers talked of a housing boom inside an economic miracle, it was followed by an almighty crash and the deepest recession this century. In the headlong rush towards the next election, the Deputy Prime Minister seems to have forgotten his Prime Minister's warning."

Mr Major said only last year that the 1988 boom in house prices had helped to create the last recession with a "crazy" spiral that had eventually destroyed economic confidence with the negative equity trap.

While Mr Major and Kenneth Clarke, the Chancellor of the Exchequer, insist that they will stop any return to the days of boom and bust, the political pressures for interest-rate restraint are fierce in the run- up to the election, which could come at any time from the end of February.

But in an interview with Le Figaro on Tuesday, Mr George warned: "For the fifth consecutive year, we are seeing solid growth of the economy. In order to contain this growth, it will be necessary, sooner or later, to increase interest rates."

Mr George, who has been warning of a "significant risk" to the Government's inflation target, has been pressing for an increase in interest rates for some time and has clearly not been satisfied by the pre-Budget, 0.25 point increase, to 6 per cent, at the end of October.

According to the minutes of the 30 October meeting between Mr George and the Chancellor, published on Monday, Mr Clarke felt "activity was picking up in the housing market, but sales of houses in London were distorting the overall picture which remained patchy". However, the minutes added: "Demand was high and supply was restricted as home-owners were still keeping their houses off the market in expectation of further price increases. He certainly did not want the recovery in the housing market to get out of hand and would watch it closely."

The latest forecast on house prices, from Swiss bank UBS, is for a 10 per cent rise next year, "the first time the UK has experienced double- digit house-price gains since 1989" - though Abbey National is more cautious, going for 7 per cent.