House price inflation picks up as UK average passes £175,000 mark

House prices rose strongly again last month, the Halifax said yesterday as the Bank of England left interest rates steady at 4.5% for the eighth month running.

The Halifax, the country's largest mortgage lender, reported that prices rose 0.9% in March from February, pushing the annual rate of increase up to 6.2%, its highest in almost a year. In March the UK average house price passed £175,000 for the first time. The monthly rise followed a strong increase in February and is the latest in a string of reports suggesting house price inflation is picking up again after dipping close to zero last summer.

Economists think the renewed strength in the housing market is a key reason the monetary policy committee has not responded to weakness in other parts of the economy by cutting interest rates again. Ross Walker at Royal Bank of Scotland said: "The apparent pick-up in house price inflation will leave the MPC reluctant to lower interest rates for fear of igniting another borrowing boom."

Analysts think the MPC is likely to leave the cost of borrowing steady for months but many think slowing inflation and sluggish consumer spending will eventually force the Bank of England to reduce rates, especially if the property market comes off the boil in the second half of the year.

The Halifax cautioned that prices might already be past their peak, having risen by only 1.6% in the first quarter of 2006, a slower pace of growth than the last two quarters of 2005.

"There are also signs that housing market activity might be beginning to level off," said Halifax chief economist Martin Ellis, referring to figures last week from the Bank of England showing the first fall in new mortgage approvals since the autumn of 2004.

He expects house prices to increase by only about 3% nationwide throughout this year, broadly in line with inflation and in spite of the rapid increases of the first quarter.

"The weakening in the labour market, the continuing high level of house prices in relation to earnings and pressure on householders' finances from the recent hikes in utility and council tax bills are all expected to curb demand in the coming months, therefore preventing a sustained acceleration in house price inflation," he said.

Alan Castle, economist at Lehman Brothers, agreed: "We expect affordability constraints - especially in regions outside of London and the south-east - to lead to a slowdown in house price inflation in the second half of the year."

The Halifax figures showed that the biggest house price gains in the first quarter of the year came in Wales, up 4.5% from the fourth quarter, East Anglia, up 3.4%, and the east Midlands, up 3%.

In the east Midlands and Wales, the average price exceeded £150,000 for the first time and only four regions of the country have an average price below that level.

In spite of reports from London agents that the capital's property market is booming again on the back of big City bonuses around the turn of the year, the Halifax figures showed that quarterly rises in London and the south-east, at 0.5% and 0.2% respectively, were below the average. London was the only region, however, where the annual pace of increase in the first quarter was faster, at 7.2%. The north was the only region where house prices fell, by 1.2%, from the previous quarter.

The Halifax said the north-south divide had narrowed to its smallest in more than eight years because of rapid price growth in the north last year. Prices in the south in the first quarter were on average £79,400 higher than in the north, a £19,600 reduction from early 2003 when it hit a record £99,000.