House prices in the UK rose by 0.9% in June, third rise in the past four months, according to the latest survey from the Nationwide building society.

The growth in prices also meant an annual rate of house price decline to just 9.3%, well down from the 11.3% reported in May.

With the increase in prices, the cost of an average home in the UK during June was £156,442, however, this is £15,973 less than a year ago in June 2008.

Nationwide added that any sustained price recovery still faces some risks. At present, there are abnormally low supply levels of new homes coming on sale, a factor which is unlikely to last forever, as the recent price increases should make previously hesitant sellers feel more confident about marketing their properties. Additional supply is also likely to come from homeowners who see their financial position impacted by higher unemployment and lower incomes. With the stock of property available for sale likely to eventually increase, house purchase demand will need to rise more convincingly from current levels to prevent a possible relapse in price levels.

Main Points
- House prices rose by 0.9% in June
- Low supply supporting prices for now, but a sustained recovery still faces risks
- Average cost of a home: £156,442

Nationwide also commented that “another factor that is vital to demand levels is housing affordability. Following the house price and interest rate declines of the last two years, initial mortgage affordability as a percentage of take-home pay is now slightly below its longrun average, suggesting that housing valuations have returned to a more normal level. Initial affordability, however, does not take into account the fact that interest rates may rise over the lifetime of a mortgage. With interest rates currently at unusually low levels, initial affordability may therefore be painting a somewhat misleading picture of the true position. This is highlighted by the fact that the simple house price to earnings ratio – which does not depend on the current level of mortgage rates – is still some way above its long-run average. The recovery in housing demand could therefore easily stall if and when interest rates begin to rise again. Although base rate is unlikely to increase in the near future, the money market swap rates that determine fixed rate mortgage pricing have already begun to increase in anticipation of an economic recovery and in response to record levels of government bond issuance.”

Commenting on the figures Martin Gahbauer, Nationwide’s Chief Economist, said: “The price of a typical house rose by a seasonally adjusted 0.9% in June, building upon the improving trend seen over the last several months. At £156,442, the average house price across the UK was still 9.3% lower than a year ago, but this marks the first time since July 2008 that the year-on-year fall has been in single digits. The three month on three month rate of change – a smoother indicator of the short-term price trend – turned positive for the first time since December 2007 to stand at 0.9%, up from -0.4% in May. If the pattern of price movements seen in the first half of the year is repeated over the second half, then prices could show only a small single digit fall for 2009 as a whole. This would represent a stark shift from trends seen at the turn of the year, when most indicators were pointing to a repeat of the large declines seen in 2008.

On balance, the stabilisation of house prices is a welcome surprise that did not seem likely at the beginning of the year. However, there are still considerable headwinds facing the demand side and until we see a more robust recovery in house purchase activity, it is too early to be confident about a full-scale recovery of prices.”