February surge in house prices dashes hopes of interest rate cut

House prices shot up 1.4% last month to give the biggest annual rise in nine months, Halifax said yesterday, but it cautioned that the market was not about to take off again.

City analysts said the news made it certain that the Bank of England would not announce another cut in interest rates after its monthly meeting today. Rates are at 4.5%, where they have been since being cut by a quarter of a percentage point last August.

The country's biggest mortgage lender said the February rise in house prices followed a fall of 0.2% in January and the volatility was typical of a slower housing market. The rise on the month also contradicted rival lender Nationwide's recent report of a small fall for February.

Although the Halifax figures showed prices up 5.5% from a year earlier in the latest three months, it repeated its forecast that the total rise this year was likely to be only around 3%. "A number of factors should constrain housing demand and prevent a significant, and sustained, acceleration in house price inflation in 2006," said Halifax economist Martin Ellis.

"The continuing high level of house prices in relation to earnings will curb the ability of many potential first-time buyers to enter the market. Council tax and utility bills increases of well above inflation in 2006 will also put downward pressure on householders' finances. Additionally, the weakening in the labour market should temper housing demand."

Some of the strength in the housing market appears to be driven by a flood of City bonuses and oil profits from Middle Eastern investors into the London property market, where prices have moved up sharply since the beginning of the year.

A separate report from estate agents Felicity J Lord yesterday showed City flats had seen a fresh wave of buying interest last month, pushing prices up 1.4%, particularly in Docklands, where the average flat was now £288,000, well above the country's average home price of £174,000. "London has been leading the revival across the country since the new year," said managing director Darren Box.

Halifax also reported that the cost of owning and running a house had risen three times as fast as inflation because of rises in interest rates, utility bills and council tax. It said those costs rose 7.6% in the 2004/05 financial year and by 14% over the last three years.