RTTNews - UK house prices rose unexpectedly in May to record the largest increase since October 2007, a report from the Nationwide Building Society said Friday.

The house price index rose 1.2% in May from the prior month, reversing a 0.3% decline reported in April. House prices increased for the second time in three months. Economists were looking for a monthly decline of 0.9%. The price of a typical house totaled GBP 154,016 compared to GBP 151,861 in April.

Year-on-year, house prices were down 11.3% in May. This was smaller than the 15% decrease seen in April and 13.7% decline expected by economists.

Although the short-term trend in house prices has clearly improved from where it was at the beginning of the year, it is still too early to say that the market is turning definitively, Martin Gahbauer, Nationwide's Chief Economist said.

The mortgage lender sees house price declines to continue due to the current combination of rapidly rising unemployment and tight credit. However, the improvement in house price trends is consistent with signs of stabilization in several other economic indicators and suggests that any further price declines might occur at a less rapid pace than in 2008.

The ratio of sales to unsold stock recently stabilized somewhat, indicating some improvement in price trends over the prior few months. But, the mortgage lenders said it is not certain whether the sales-to-stock ratio would rise on a more sustained basis.

The Nationwide noted that house sales still remain close to record lows. So the improvement in the supply-demand balance is mostly due to a decrease in the stock of property on estate agents' books.

Further, the building society found several factors for the decline in stock levels. Firstly, the rate at which additional property coming onto the market could be lower than the rate of sales and secondly the unsold stock levels could fall if existing sellers give up and withdraw their properties from the sales market.

According to the Nationwide, the recent moderation in the pace of house price falls may not be sustained provided the supply of homes onto the market does increase. The ultimate outcome for prices depends much on the development of demand as it does on supply dynamics.

Buyer interest picked up strongly and if this translates into sales, outweighing potential increases in supply, the recent moderation in price falls would continue. The mortgage lender said it is unclear how the balance between supply and demand would work through in the months ahead.

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