House prices rocketing despite recent rate rise

Property prices continued to soar in May, rising 2.2% and taking the price of the average UK house to ?157,849.

According to the monthly house price index published by Halifax, prices have risen by more than 20% over the last 12 months, the highest figure since June last year.

The average home in the UK is now 10.3% more expensive than it was at the beginning of the year, at ?157,849.

Meanwhile, Halifax said the rate at which new homes were being built was failing to keep up with the rise in the number of new households. The lender estimates that if current levels of housebuilding continue, there will be a shortage of half a million homes in England by 2021, which will continue to put upward pressure on prices.

But despite signs that the market was accelerating, Halifax said it still expected price growth to slow later this year and into 2005.

Martin Ellis, chief economist at Halifax, said: "The market has remained very strong in northern England and Wales so far this year and house price inflation in the South has picked up following a significant slowdown during 2003.

"We expect the north and Wales to continue to outperform the rest of the country over the remainder of the year, resulting in a further narrowing in the north/south divide.

"Higher interest rates and the increasing difficulties that face aspiring first-time buyers should, however, exert downward pressure on house price inflation later in the year and into 2005, including in the north where there has been rapid house price growth in recent years."

As prices carry on rising, getting a foot on the property ladder is becoming increasingly hard for first time buyers. Less than three in ten people buying property in May were first time buyers, well below the long term average of 50%.

The strong rise in house prices suggested the three interest rate rises seen since November had had little impact on the market so far.

Philip Shaw, an economist at Investec, said: "We are not entirely surprised that the Halifax is pointing to another strong increase in prices - it is entirely consistent with other figures we have seen for May.

"There is little doubt that house price growth has yet to modify. It makes it more likely the Bank of England will raise rates on Thursday."

He expects interest rates to end the year at 5%, peaking at 5.25% in early 2005.

Hilary Cook, an analyst at Barclays Stockbrokers, said: "I think the question is: Do we get the interest rate hike this month or next month? It's quite finely balanced.

"The housing market is clearly still going too fast, but there is likely to be an effect from the increases to date, and it is too early to see the effect of last month's increase.

"They [the Monetary Policy Committee] may give them another month to work. The last thing they want to do is burst this bubble."