House prices rise at fastest rate for a year

House prices last month unexpectedly rose at the fastest pace for almost a year, the Halifax said yesterday, but it warned it could be a short-lived bounce based on the Bank of England's recent cut in the cost of borrowing.

The building society said seasonally adjusted monthly property values increased by 1.6% in August - the sharpest rise since September 2004.

Martin Ellis, the Halifax's chief economist, said: "This pick-up in monthly house price inflation is consistent with the continuing upward trend in market activity in recent months and the previous pattern of house price movements when the Bank of England begins to reduce interest rates."

Last month the Bank's monetary policy committee cut rates to 4.5% from 4.75%. The committee will conclude its September rate-setting meeting today but the City is not expecting any change in the cost of borrowing this month.

Whenever the Bank of England has cut rates since 1997, there has been an improvement in house prices. But this has proved a temporary phenomenon, the Halifax said.

Economists pointed out that this survey was at odds with other recent data. For instance, the Nationwide survey showed prices falling by 0.2% last month.

In spite of last month's move, house prices have only increased by 2.5% in the last year. "This marks a significant downward trend in underlying house price inflation over the past year with the annual rate at 21.3% in August 2004," said the Halifax.

Mr Ellis said: "The slowdown in economic growth in 2005 and the high level of house prices in relation to average earnings will, however, continue to curb housing demand and should prevent a renewed surge in house prices."

Separately, housebuilder Wilson Bowden said it was seeing a few more house hunters at its showrooms but confidence remained fragile. The company said its profits before tax for the first 26 weeks of the year to July 1 were £98.5m, a 13% decline on the same period last year. Rival builders Wimpey and Taylor Woodrow also reported a slide in profits earlier this week.

Wilson Bowden chief executive Ian Robertson said: "I have seen no underlying pick-up in reservation levels or customer confidence since the general election. I'm beginning to believe that it's probably next year's spring selling season before we can reasonably expect to have any hope in a change in that situation."

Although a further rate cut would be welcome to help stimulate the housing market, there is also an issue with employment confidence for the first time in many years, added Mr Robertson.

In contrast, property consultant Savills reported profits before tax in the first half of the year rising 4% to £19.9m. Excluding a one-off payment last year, profit rose 15%.

Savills' residential business focuses on the top end of the market, where homes are worth £1m or more. Most of its business is in commercial and investment properties.

In recent weeks it has seen demand for top-end residential property picking up.

Chief executive Aubrey Adams said: "This end of the market is not driven by what happens to the cost of mortgages. People at this end of the market often do not need to borrow money. It has more to do with general confidence in the financial markets."

Demand for commercial property and from institutional investors remained strong. Pension funds and life assurance companies are still interested in increasing their weight in property. "It has performed better than equities and is less volatile," said Mr Adams.