LONDON -- U.K. house prices posted their strongest monthly rise in more than two and a half years in August, the latest sign that the market is recovering from the credit crisis, data released Thursday showed.
The price of a typical home rose 1.6% on a seasonally adjusted basis in August to £160,224 ($260,315), the strongest monthly rise since December 2006, the Nationwide Building Society said. That leaves prices 2.7% weaker than in August last year. In July, prices rose 1.4%, leaving them 6.2% weaker on the year.
"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%," Martin Gahbauer, the mortgage lender's chief economist, said in the report.
The August increase in prices is likely to surprise market participants. Economists were expecting a 0.4% monthly gain and 3.7% drop on the year, according to a Dow Jones Newswires survey last week.
Nationwide said the three-month rate of change, which compares home prices over the latest three months with the previous three months and is seen as a smoother indicator of the near-term trend, rose to 3.3% in August from 2.7% in July, the highest level since February 2007.
The figures suggest the property market is on the mend, although economists note that sales continue to be limited by the weakness of the economy, high unemployment, and a lack of availability of housing loans.
On Monday, house builder Bovis Homes Group PLC said property prices appeared to be stabilizing, but added that it expected sales to remain subdued because mortgage lending was still tight.
Recent market indicators show house prices have been supported by a combination of pent-up demand and low supply of property on the market.
Nationwide said last month that there was a reasonable chance that U.K. house prices post a slight increase this year. Since then, other indicators have also shown confidence is improving.
A survey published Wednesday by Rightmove, a property Web site, found 78% of respondents don't expect house prices to fall any further over the next year - a sharp reversal from January when two thirds of respondents expected prices to drop over the amowing 12 months.
The Nationwide figures show the annual change in house prices has recovered sharply from a record drop of 17.6% in February.
"The year-on-year change will probably turn positive in the next month or two, and house prices will probably end this year up about 5% on the year," Michael Saunders, an economist at Citi, said in a note. "The strong recovery in housing supports our view that the U.K. economy as a whole is likely to recover more strongly than the consensus expects over the coming year."
Nationwide said the exceptionally low level of interest rates also explained why house prices hadn't repeated last year's steep falls. The Bank of England has held its main interest rate at a record low of 0.5% since March and pumped billions of pounds into the economy to boost credit.
Lower mortgage rates were helping to keep a lid on distressed sales, which tend to lower prices, Nationwide said. The cheaper credit was also helping to generate interest in property and support sales, it added.
"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," Mr. Gahbauer said.
WSJ