House prices increased 5.9% during year

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House prices rose by 5.9 per cent in 2009 as the UK property market bounced back from last year's double digit declines, figures showed today.

The average cost of a UK home rose by another 0.4 per cent in December to £162,103, marking the eighth straight month of price increases, according to Nationwide Building Society.

The performance in 2009 is a surprise turnaround on the hefty 15.9 per cent price plunge in 2008 and comes despite the worst recession in the UK since the Second World War.

Today's figures see the past decade end on a high note for the UK property sector which had been hammered last year by the credit crunch and the banking crisis.

And Nationwide said the past decade was the strongest on record for British house prices in spite of the woes of 2008.

Ten-year figures show property values rose by 117 per cent since the end of 1999.

Even with inflation taken into account, the average home increased by 68 per cent in value compared with a 14 per cent fall in real terms in the 1990s.

Martin Gahbauer, Nationwide's chief economist, said the increase in house prices this year "surprised most commentators".

He added: "Few could have foreseen this development at the start of the year, when the near term price trend was still pointing to a repeat of the double digit annual decline experienced in 2008.

"Although house prices are still 12.2 per cent lower than their October 2007 cyclical peak, they have now rebounded by an impressive 8.9 per cent since their February 2009 trough."

But the picture for 2010 is unclear, with a recent slowdown in price rises raising concerns over the sustainability of the market recovery.

December's 0.4 per cent rise is significantly below the hikes of up to 1.4 per cent recorded in the summer.

Three month on three month growth rates - generally considered to be a smoother indicator of the underlying trend - also eased during December to 2.1 per cent from 2.8 per cent in November.

The past year was buoyed by "pent-up demand" as cash buyers not restrained by the credit drought entered the market, Nationwide said.

Record low interest rates, a smaller-than-feared increase in unemployment together with recent stabilisation in the banking sector and signs of an economic recovery also acted as a boost.

While interest rates are expected to remain low well into 2009, there is uncertainty over the labour market and whether cash buyers can continue to support housing demand.

Mr Gahbauer said: "This year's recovery has to some extent been driven by transitory factors and there are reasons to believe that it will lose momentum over the coming year.

"At the same time, there is no obvious catalyst on the near-term horizon that would trigger significant renewed falls in prices.

"At this stage, therefore, it seems likely that 2010 will see no significant house price movements in either direction."

The group's figures show that London saw the strongest growth throughout 2009, with the average home in the capital now costing £276,088 - 7 per cent more than it did a year ago.

Northern Ireland was the worst performing region, with prices falling 6.7 per cent to £137,949.

Carlisle in Cumbria was the best performing of all the UK towns and cities in 2009, with prices soaring by 10 per cent to £136,666.

Leicester suffered opposite fortunes, with home prices down 9 per cent to £141,643.

Over the past decade, Wales notched up the biggest rise in house values, with an 82 per cent hike in real terms, after inflation.

England saw the weakest growth in the noughties after prices increased by 65 per cent, said Nationwide.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "While the Nationwide data indicate that house prices ended 2009 still on an upward track from their February low, the markedly reduced increases in the final months of the year suggest that the rally is flagging.

"This fuels our suspicion that house prices are likely to suffer a modest relapse in 2010."