RTTNews - UK house prices rose at the fastest pace in more than two and a half years as exceptionally low interest rates prevented a repetition of sharp falls witnessed in 2008, a closely watched report showed Thursday.

House prices rose for the fourth consecutive month in August, increasing by 1.6% month-on-month on a seasonally adjusted basis, the Nationwide Building Society said. That was the biggest monthly gain since December 2006. Economists had expected house prices to grow only 0.5% after a revised increase of 1.4% in July.

The average price of a typical UK property was GBP 160,224 in August, up from GBP 158,871 in July. On a more positive note, the pace of annual decline in house prices eased sharply to 2.7% from 6.2%. Prices have been falling since April 2008 on an annual basis.

Over the first eight months of 2009, the seasonally adjusted index of house prices has risen by 3.2%, though relative to the October 2007 peak it is down by 14.4%, the Nationwide said.

The three-month on three-month rate of change, considered as a smoother indicator of the near term trend, rose to 3.3% in August, the highest level since February 2007, from 2.7% in July.

The latest report of a further rise in house prices follows an earlier news that mortgage approvals hit the highest level since February 2008. On August 25, the British Bankers' Association announced that the number of mortgages approved in July totaled 38,181 compared to 35,564 in June.

Nationwide's chief economist Martin Gahbauer said mortgage payments for existing homeowners, especially those with tracker or standard variable rate loans, have been reduced substantially after interest rates were brought to a record low.

Earlier this month, the Bank of England held its key interest rate at a record low of 0.5%, where it has been staying since March 2009. The central bank also expanded its asset purchase scheme to GBP 175 billion from GBP 125 billion to shore-up the recession-hit economy.

Lower interest rates have also had an impact on the demand side of the housing market. Even though house prices remain high relative to earnings, the fall in interest rates has improved the affordability of mortgages for those looking to buy a home, Gahbauer said.

Further, the Nationwide economist said, while low interest rates have clearly played a part in reversing the downward pressure on house prices, they are unlikely to stay at the current level forever. It is important to keep this in mind when interpreting recent price trends.

According to him, the BoE may need to tighten its monetary policy if various monetary and fiscal stimulus measures, which are in place, bring sustainable growth that may cause the re-emergence of inflationary pressures.

When this happens, it will probably have the effect of releasing additional supply back onto the market and dampening the recent rise in buyer interest. Under such conditions, the strong price increases of recent months would become difficult to sustain, Gahbauer said.

He added that 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.

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