Landlords 'boosting house prices

House prices rose by 0.8% last month, pushing the annual rate of house-price inflation to double the level in July last year, a survey showed today.

Nationwide building society said the annual increase in the cost of an average home was 5.9% in July, compared with 5.0% in June and the highest growth rate since April 2005. The average home now costs £167,733, almost £10,000 more than this time last year.

House-price inflation has outstripped earnings growth for many years, making buying a home less affordable for an increasing proportion of the population. But the fall in affordability does not appear to have dampened demand for property.

Fionnuala Earley, Nationwide's group economist, said a booming buy-to-let market was one of the drivers to price growth, as people who have been priced out of the market are forced to rent instead.

In addition, she said an increase in the number of migrant workers has pushed up demand for rental accommodation.

"The reduction in demand from owner-occupiers may have been replaced by landlords increasing their demand for house purchases to respond to increased tenant demand," she said.

"While rental yields have been falling as house prices increase, landlords are still attracted by the performance of housing as a long-term investment. Evidence suggests that about half see their rental property as a nest egg, perhaps supplementing or replacing more traditional pension investments."

Last year growth in house prices slowed sharply after years of double-digit increases. But increasingly the evidence points to a housing market returning to health, with this survey the latest of many showing increased activity.

Howard Archer, chief economist at Global Insight, said: "The firming of house prices in July is clearly a consequence of the recent renewed strengthening in housing market activity.

"Indeed, house prices may well see further marked increases in the near term, given the current level of mortgage activity, survey evidence showing strong buyer interest and a reported shortage of properties in some areas.

"This is particularly true of London and the south-east, which are currently showing the strongest increases in house prices by a significant margin."

Most economists expect the Bank of England's monetary policy committee to leave rates on hold at 4.5% at its meeting this week, but the signs of a strengthening housing market as well as the recent spike in inflation to 2.5% could increase the chances of a rate rise later in the year.