House prices rising at fastest rate for two years, says survey

House price inflation was at its fastest pace in almost two years in July, according to a survey out today, but a drop in new buyers points to a slower property market ahead. House prices in England and Wales rose by 0.6% during the month to an average £166,500, taking year-on-year growth to 3.2%, according to research group Hometrack. That was the fastest annual pace of increase since October 2004 but was coupled with the first decline in buyer numbers this year.

"The growth in prices over July may seem at odds with the decline in demand," said Richard Donnell, Hometrack's director of research. "However, against the background of a limited supply of housing for sale, agents are still reporting continued upward pressure on prices, especially in southern England."

Hometrack also noted that a strong market in London, where prices rose 1.1% in July, continued to flatter headline readings and that, in reality, prices across two-thirds of the country remain unchanged.

Outside London, the region with the biggest rise in prices in July was Wales, where homes appreciated by 1%. Prices did not budge in the East Midlands.

Economists, lenders and housing market experts say affordability difficulties for many buyers are likely to constrain house price growth. If the Bank of England raises interest rates to stem inflation, as many observers expect, the housing market could be further dampened.

Mr Donnell said: "We expect levels of demand to moderate over the rest of the summer and into the autumn with any increase in interest rates compounding the likely slowdown. Overall, we expect average house prices to rise by 4% over the year."