HOUSE prices are rising at an "unsustainable rate", the Nationwide Building Society warned as figures revealed a 1.1 per cent increase during July.

During the year to the end of July, prices rose by 10.9 per cent, increasing the average cost of a house to £89,962.

Although July's increase was down on June's rise of 1.9 per cent, Nationwide said it was "increasingly likely" that it would revise its current forecast of a seven per cent jump in house prices during 2001.

Alex Bannister, Nationwide's group economist, said that although there had been a "modest slowdown" in the pace of growth during July, prices were still rising significantly faster than a year ago.

In July last year, prices fell by 0.3 per cent in response to slower salary growth and fears that the London housing market was overheating.

He said the group had forecast a seven per cent increase for the year on the assumption that growth in London and the South-East would slow to a more sustainable rate during the year, but there was currently no evidence that this was happening.

Mr Bannister added that Nationwide was still predicting a weakening in consumer confidence, leading to lower house price inflation later in the year, though at present there was "no discernible dampening effect" on the market.

The group said the market's buoyancy had brought an upturn in sales, with more first time buyers emerging.

House sales during the first three months of this year were ten per cent lower than during the previous year, but the number of people moving house has now increased, and mortgage approvals for buying houses are 15 per cent higher than last year. Nationwide predicts that during the remainder of this year, about 1.4 million homes will change hands.

The figure is similar to last year's house sales, but well down on the level reached during the 1980s boom, when about two million houses were sold in a year.

Simon Rubinsohn, chief economist at stockbrokers Gerrard, said he did not think house prices were rising at an unsustainable rate and the market should remain firm.

"I do not see a real risk of a repetition of the 1980s. We would need to see a more substantial rate of growth in housing prices.

"Unless we see some meaningful deterioration in consumer confidence, the market is looking to remain firm."