House prices increased in June by 1.1%, which represents the highest increase in 2007. The pick up in the housing market witnessed in June brings the annual rate of house price inflation to 11.1%, its highest level since January 2005 and more than twice as fast as the pace of growth at this time of year. The price of a typical house is now £184,070, more than £18,000 higher than at this time last year, which is the equivalent of a rise of more than £50 per day.

Commenting on the figures, Fionnuala Earley, Nationwide’s Chief economist, said: “earlier house price data had shown the start of a slowing in the market, but while too much emphasis should not be placed on one month’s figures, the fact that today’s data shows a bit of a bounce will add to the upside risks being counted up at the Bank of England. While we expected interest rates to increase to 5.75% in August, this news, together with the revelation that rates remained on hold only by the narrowest of margins in June, will set the stage for that rates rise to move forward to July and for he risk of a rise to 6% to increase significantly.

The underlying trend for house price growth may be moving towards a softening of the market.

Recent interest rate rises and stretched affordability has so far lead to a slight decrease in mortgage approvals. Commenting on the mortgage market, Adrian Coles, Director-General of the BSA said: “There is likely to be more subdued lending as the year progresses and the rate rises continue to feed through. Another rate rise would add to the slowdown later in the year and into 2008. However, a reasonably strong economic outlook, especially continuing robust employment, should provide support to lending and property prices.”

According to data released by the Council of Mortgage Lenders (CML), gross lending reached a new May record of £30.6 billion.  The figure is up by 12% on April's lending total of £27.4 billion and is 5% higher than the same month in 2006 (£29 billion). However, the rate of year-on-year growth is not as high as we have seen in the first four months of the year - typically around 12-15%.

CML Director General Michael Coogan said: "Going forward we expect lending to ease as we progress through the year, but the market will remain in good shape. Although further interest rate rises will continue to dampen demand, we are still on course to meet our prediction of a record £360 billion of lending during 2007."   

The current growth witnessed in the housing market has lead to many commentators holding the rise of the buy-to-let investor responsible. As more first time buyers are being priced out of the market, it is the booming buy-to-let that looks to be threatened, with many calling for tighter regulations and less tax benefits for these investors. Commenting on this subject, Fionnuala Earley, Nationwide’s Chief economist, said “If Gordon Brown were to do something radical in this area, any policy he chose would have to be carefully thought out and introduced in a measured fashion.  Given the rapid growth in the buy-to-let sector in recent years, a dramatic change for the financials of landlords, particularly in a period of rising interest rates, could lead to some uncomfortable consequences.”

“An ill thought out measure which flooded the property market could do more to destabilise the market for all borrowers rather than just make it a more comfortable prospects for new entrants”, she continued.

UK interest rates have risen by 1% since last August, to 5.5%, and are almost certain to rise again soon. The Bank of England’s Monetary Policy Committee next interest rate meeting is on the 5th July. Many analysts are expecting an increase in interest rates, last raised in May 2007. A rise has been made more likely due to the well documented persistent house price inflation.