Housing market recovery falters but prices come within 10 per cent of peak

House prices continued to rise last month but a slowdown in the pace of growth highlighted the fragile nature of the recovery.

Property values edged up at a monthly rate of 0.5 per cent in May, lagging behind the 1.1 per cent gain seen in April and the 1 per cent rise recorded in March, the Nationwide Building Society said yesterday. The annual rate of growth eased to 9.8 per cent from 10.5 per cent in April, which had seen the first double- digit rise in yearly terms since the summer of 2007.

Although weaker, last month's gains brought prices to within 10 per cent of their October 2007 peak, the Nationwide said. The May data followed an uninspiring Bank of England report this week about the pace of growth in mortgage approvals for house purchases, which added to worries about the outlook for activity in the property market.

"The economic fundamentals are still far from robust for the housing market," said Howard Archer, the chief UK economist at IHS Global Insight. "There are also growing concerns that the Bank of England will have to raise interest rates before the end of the year due to higher-than-expected inflation. We believe that house prices are likely to be erratic over the coming months."

Many analysts believe that property prices have continued to rise over the past few months only because so few homes are coming on to the market.

Accordingly, an increase in supply – caused by new taxes on second homes, for example, possible in the emergency Budget this month – could further jeopardise the recovery in the property market.