House prices showed slight increase last month

House prices increased slightly last month, according to the bank Halifax, although the market still faces "significant headwinds" as household finances come under pressure.

House prices were 1.2% higher month on month in June with the average home costing £163,049, the lender said.

Low interest rates and higher employment are likely to have been the main factors behind the improvement in price trends, the Halifax said.

Despite the month-on-month improvement, the Halifax said it expects pressure on housing demand to continue.

Housing economist Martin Ellis said: "Low interest rates, an increase in the number of people in employment and some tightening in market conditions earlier in the year are likely to have been the main factors behind the recent improvement in price trends.

"A slowly-improving economy and sustained low interest rates should help to support broad stability in the market over the coming months.

"The market is, however, likely to continue to face significant headwinds, which are expected to constrain housing demand. Low earnings growth, higher taxes and relatively high inflation are all continuing to put pressure on household finances."

House prices in the three months to June were 0.5% lower than in the previous quarter - but this was the smallest quarterly fall in prices since the second quarter of last year.

The three-month average was 3.5% lower than a year ago, and prices were broadly flat when compared to the start of the year, the Halifax added.

Interest rates - currently held at historic lows of 0.5% - have helped improve affordability, the bank said.

Typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in mid-2007 to 28% in the second quarter of 2011.

The number of people in employment increased by 80,000 in the three months to April compared to the previous three months, according to the Office for National Statistics, which would have supported the market.

Howard Archer, chief UK and European economist at IHS Global Insight, said despite the monthly spike in house prices in June, prices are likely to fall by around 5% from current levels by mid-2012.

He said: "We anticipate that house prices will retreat modestly as squeezed purchasing power, tightening fiscal policy, a soft labour market and worries over the economic outlook weigh down on potential buyers. These headwinds are seen modestly outweighing the support to the housing market coming from likely persistent low interest rates.

"However, we have reduced our projected drop in house prices by mid-2012 to 5% from 8%, primarily due to the fact that we now expect interest rates to start rising later and more slowly than we previously projected."

The Bank of England is set to keep interest rates on hold tomorrow amid further signs that the UK's economic recovery is faltering.