Property prices rise again in UK due to low interest rates

Residential property prices in the UK rose for the fourth month in a row in August with lack of supply helping to keep the real estate market on an upward trend.

The latest price index from Nationwide, the country's largest building society shows that the average price of a property rose 1.6% to £160,224. Prices are now 3.2% higher than at the beginning of the year, it said.

The monthly increase also reduced the annual rate of price deflation to 2.7% compared with July's figure of 6.2%. But prices are still 14.4% below their peak of October 2007.

The three-month trend, which is considered a better indicator of how the market is faring than the one-off monthly figure, showed an acceleration in price rises from 2.7% in July to 3.3% in August. This is the highest level of three-monthly growth since February 2007.

Nationwide said it is low interest rates and a lack of homes coming on to the market that is keeping prices on the increase and warned that future increases in rates to more normal levels could hit the recovery.

'The exceptionally low level of interest rates offers some explanation for why house prices have not repeated the very sharp falls of 2008,' said Martin Gahbauer, Nationwide's chief economist.

The reduction of the Bank of England base rate to just 0.5% meant households who were using around 38% of their take-home pay to service their mortgage debt have seen that figure fall to just 28%, Gahbauer explained.

'The fall in debt servicing costs has meant that fewer homeowners are under immediate financial pressure to sell than might have been expected in a recessionary economic background with rising unemployment,' he said.

'Partly as a result, fewer second-hand properties have come on to the market than is normally the case in recessions, which has contributed to moving the balance of supply and demand more in favour of sellers over the course of 2009,' he added.

But he warned that a rise in rates to more normal levels as the economy improves could make life harder for homeowners and buyers and make strong prices difficult to sustain. 'At the moment, a rise in interest rates is probably still some way off. However, the eventual exit from exceptionally loose monetary policy could make the recovery in the housing market bumpier than some might expect after the last few months of price increases,' he said.