House price inflation continued to show modest growth in June, according to a closely-watched monthly survey from Nationwide, the UK’s biggest building society, released on Thursday.

Nationwide, said prices edged up by 0.3 per cent this month following gains of 0.2 per cent in May and 0.1 per cent in April. The annual rate of growth increased slightly to 5 per cent in June, but only because there was a fall of 0.1 per cent this time last year.

The building society said the price of an average house is now £165,730, around £8,000 more than this time last year

The figures were broadly in line with analysts’ expectations and support recent surveys and data which have pointed to a slowing in house price growth.

Commenting on the figures, Fionnuala Earley, Nationwide’s group economist, said: “Estate agents’ and house builders’ data show signs of more buoyant demand in May after a weak April. This could be a response to faster house price growth through the spring, and may support further price rises in the short term. However, focus on the World Cup may mean lower activity in June which would seem more in line with house purchase approvals data from the Bank of England which has shown a softening trend”.

On the supply side, Ms Earley said the data showed that at current rates of house building, there would continue to be significant undersupply of housing at the assumed household formation rates.

“However, while demand seems fairly stable, the deterioration in affordability and its likely impact cannot be ignored. Mortgage payments for someone on average earnings now take up around 42 per cent of take home pay compared with around 32 per cent three years ago. While earnings growth remains lower than house price growth the ability to pay constraint will continue to bite”.

Ms Earley said.

The continued increase in house price growth is unlikely to have much effect on the Bank of England’s rate decision in July as it is at a slower pace than at the beginning of the year.

Ms Earley added: “The latest set of minutes from the MPC was full of “ifs” and “somewhats” illustrating the significant, yet finely balanced risks to inflation and hence interest rates. While financial markets are still pricing in an increase in rates by the end of 2006 and a further increase in 2007, the tone of the MPC was very measured, suggesting that they are still in wait and see mode and that interest rates are likely to remain at 4.5% for some time to come”.

Howard Archer of Global Insight said: “House prices could be settling back into a period of relatively modest increases, after spiking up in the latter months of 2005 and the beginning of 2006.

“Significantly, already stretched affordability has been adversely affected in recent months by house price inflation moving back well above average earnings growth, and affordability will be pressurised further over the coming months by modest earnings growth and markedly increased utility bills”, Mr Archer said.

However, Mr Archer added: “It is entirely possible that house prices could see renewed strength in the near term, given the pick-up in mortgage activity in May and latest survey evidence generally showing that buyer interest is high”.

On Tuesday, British Bankers Association data showed the number of mortgage approvals jumped in May, but analysts cautioned that the rise was largely due to the timing of Easter and seasonal factors.

Kelvin Davidson of Capital Economics said: “Once we adjust for seasonal factors, and putting aside the Easter-related blip, monthly mortgage approvals for house purchase have averaged around 70,000 since September last year”.

He expected the Bank of England mortgage approval figures, due later on Thursday, to be slightly higher than the 106,000 recorded for April.

The next edition of the Financial Times House Price Index, which aims to smooth out variations in monthly house price data, is published in mid July.

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