House price inflation continued to pick-up last month, taking the annual rate to 5.4 per cent from 4.5 per cent in April, according to the Financial Times house price index.

The figures do not show a slowdown in the monthly rise in house prices with a 0.5 per cent increase in May, exactly the same as the average monthly increase to date in 2006.

There have been signs recently that the rapid rebound in the housing market, which started last Autumn, has begun to slow. Activity in the housing market has dropped a little with mortgage approvals in April nearly 8 per cent below the average of the previous six months and estate agents reporting moderating interest from new buyers.

The FT house price index shows that these early indications of a slower housing market have not yet become apparent in the sales prices achieved in May.

Every completed property transaction in England and Wales is included in the FT house price index, using the most recent information sent to the Land Registry and a statistical model.

London still leads the way with the annual increase in prices reaching 7.9 per cent in April, the most recent month for which regional data is available. The capital was closely followed by Wales where a gain of 7.6 per cent was recorded.

The English regions with the lowest rates of house price inflation were East Anglia, the South West and the East Midlands, where rises were limited to 2 per cent, 2.2 per cent and 2.4 per cent respectively. Prices in these regions do, however, seem to be beginning to pick up, according to Gary Styles, chief economist of Acadametrics, the consultancy that compiles the index.

“All regions have experienced some house price growth over the last 12 months and, whilst London has led the way, it has been closely followed by Wales and the northern regions. There is now also evidence of the strong London market rippling out to the South East, East Anglia and the South West,” Mr Styles said.

Mervyn King, the governor of the Bank of England, warned last month that the “level of house prices still seems remarkably high relative to average earnings or average incomes or anything else you could look at,” a view that is close to the consensus among property market analysts.

From the trends in the FT house price index, Mr Styles added: “We expect the steady and stable performance from house prices and activity to continue over the remainder of 2006 as the outlook for interest rates and employment prospects limit any potential market exuberance”.

In recent months the house price inflation figures from the Halifax and the Nationwide, the mortgage lenders, have diverged, with the Halifax reporting 9.1 per cent rises in the year to May compared with 4.7 percent from the Nationwide.

The FT index now sits between those two figures, although at 5.4 per cent, it is considerably closer to the estimate from the Nationwide.

It remains unclear why there are such big differences between the two lenders’ figures since they use almost the same methods to generate their figures and base their statistics on property transactions at the mortgage approval stage.

One plausible reason is simply volatility the lenders’ figures caused by small or biased samples. The comprehensive sampling of prices used by the FT index irons out much of this volatility.

Since the FT index is partly based on a statistical model, the figures are subject to revision. This month the April average house price level has been revised up to £202,099 from £201,659.

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