Supply shortage to drive UK home prices higher

British house prices edged lower last month, in line with economists' expectations, but the annual rate of growth rose and a shortage of homes is likely to push prices up further, mortgage lender Halifax said.

House prices dropped 0.1 per cent in May, compared with a 1.6 per cent gain in April.

The year-on-year rate of growth, however, was at its highest since December last year at 8.6 per cent in the three months to May, up from an 8.5 per cent increase for the three months to April.

"The imbalance between supply and demand is likely to continue to push up house prices over the coming months. Looking further ahead, the increasing level of house prices in relation to earnings is expected to dampen house price growth," Halifax economist Martin Ellis said.

The figures contrast with those released earlier by rival mortgage lender Nationwide, which reported the lowest annual increase in house prices in nearly two years, at 4.6 per cent.

House prices on both measures were growing at a double-digit rate in the middle of last year before tighter rules on mortgage lending sapped demand.

But Britain's housing market appears to be recovering momentum. The Bank of England last week reported the biggest jump in the number of mortgages approved by lenders for six years, taking April's total to the highest since early last year.

With wages now outstripping inflation and last month's election victory of Prime Minister David Cameron's homeowner-friendly Conservative Party, many economists think house prices could rise more strongly than previously thought.

"A recent shortage of properties coming on to the market seems to be exerting increasing upward pressure on house prices," said IHS Global Insight economist Howard Archer.

"Nevertheless, the upside … is expected to be constrained by more stretched house-prices-to-earnings ratios, tighter checking of prospective mortgage borrowers by lenders and the knowledge that interest rates will eventually start rising."