Annual increase in house prices biggest since 1989

The UK property market's inexorable upward surge continued unabated as Nationwide Building Society yesterday released figures showing that house prices rose by 1.6 per cent in March, the highest monthly increase in two years.

Prices rose 9.7 per cent compared to the same month a year ago, the biggest annual increase since the third quarter of 1989. The areas showing the largest rises were concentrated mostly in the South-east of England, particularly London. Larger properties around London are in high demand as City investment houses pay bonuses at the end of the tax year.

Rob Thomas, housing analyst at UBS, the Swiss banking group, said: "This is good news for those of us who have maintained a bullish view of the market. It puts prices well on course for the 10 per cent predicted by us for this year."

He said Nationwide's figures were "in the same ball park" as those of Halifax, which reported a 6.8 per cent annual rise for February and 0.5 per cent over the month, compared to its counterpart's 0.7 per cent.

Nationwide warned that a return to a North-South divide was becoming increasingly apparent.

However, Dr Paul Sanderson, head of research at Nationwide, said the sharp rise in March may exaggerate underlying trends, which were of a more gradual upward movement in prices.

"Nevertheless, there is ample evidence of an extreme shortage of quality properties for sale, primarily in London and the South-east, suggesting strong upward pressure on prices in some areas," he said.

"Surveyors continue to report a reluctance among homeowners to place their property on the market, preferring to wait until they have found a new home. This is restricting supply and frustrating potential sales."

Dr Sanderson said evidence of the blockage came from figures from mortgage lenders suggesting a slow-down in lending over recent months. Property transactions in February also fell, according to recent reports. This, he said, "also suggests that supply log-jams may now be constraining market activity, [along with] a tendency to defer purchase until after the election."

Nationwide also suggested yesterday that there may be a growing tendency for first-time buyers to go downmarket in their search for suitable homes.

Nationwide added that it might have to revise its earlier estimates that house prices would rise by 7 per cent this year.