House prices take another step up

House prices rose for the second month in a row during August, increasing by 0.8 per cent, figures showed today.

The continuing shortage of homes for sale helped push the average cost of a property in the UK up to £160,973, broadly in line with where prices were at the end of last year, according to Halifax.

There was also a further fall in the annual rate at which prices are declining, with this easing to 10.1 per cent, the lowest figure since July 2008 - based on the average house price during the previous three months compared with the same period a year earlier.

Halifax said house prices have now risen in four of the past eight months as the market continues to show signs of stabilising.

Martin Ellis, Halifax housing economist, said: "Demand for housing has increased since the start of the year due to better affordability and low interest rates.

"This, together with low levels of property available for sale, has boosted house prices over the last few months."

House prices rose by 1.7 per cent during the three months to the end of August, compared with the previous three-month period, the biggest increase on an underlying basis since July 2007.

Today's figures are broadly in line with those reported by Nationwide, which showed house prices rising for the fourth month in a row during August, increasing by 1.6 per cent, while the annual rate of price falls eased to just 1.6 per cent.

The shortage of homes for sale, combined with rising demand from potential buyers, has helped house prices find a floor, with most of the major house price indexes now reporting some price rises.

But economists have warned that the improvement in the market may be temporary, with many saying prices could start to fall again as more people put their homes up for sale and rising unemployment leads to an increase in repossessed homes.

The recent increase in house prices has also led to the house price to earnings ratio - a key measure of affordability - rising again from its recent low of 4.25 to 4.39, compared with a long-term average of four.

While this is not too much of an issue with the Bank of England base rate at a record low of 0.5 per cent, it is likely to act as a brake on the market once interest rates start to rise again.

At the same time, mortgage funding remains tight and the number of homes changing hands continues to be well down on long-term trends and at a level which is thought to be consistent with falling house prices.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "While it is now looking very likely that April marked the trough in house prices on the Halifax measure, we suspect that they will be prone to relapses over the coming months and we very much doubt that a sharp, sustainable upward trend in house prices is in the process of developing.

"Given ongoing tight credit conditions, still relatively poor economic fundamentals and the fact that affordability ratios are moving back up now, we suspect that house prices are highly likely to suffer relapses over the coming months."

Brigid O'Leary, senior economist at the Royal Institution of Chartered Surveyors, said: "In the short-run, it seems likely that low mortgage rates and limited supply will continue to provide support for house prices.

"But it's not clear that the current period of increasing house prices will be sustainable over the medium term.

"Over the next 12 to 18 months, the housing market will still be challenged by a fitful economic recovery and any eventual increases in interest rates could leave potential buyers, as well as existing owners, in a vulnerable position."

Ed Stansfield, property economist at Capital Economics, agreed.

He said: "We continue to be sceptical that recent gains in house prices will be sustained.

"In our view, the outlook for economic growth is very weak. And if the economy turns out to be stronger than we expect, economic policy will be tightened. With the market still overvalued, neither outcome looks good for house prices."