House prices increased by 1.6% in August following a 0.4% gain in July according to Halifax figures out today. This was the biggest monthly gain since September 2004, said the lender.

All houses, all buyers index (1983=100) Index (seasonally adjusted) 537.2 Monthly change 1.6% Annual change 2.5% Standardised average price (seasonally adjusted) £165,967

Prices have increased by only 2.1% in the first eight months of this year compared with a 12.5% rise in the same period of 2004.

On an annual basis, house prices were 2.5% higher in August, marking a significant downward trend in underlying house price inflation over the past year from an annual rate of 21.3% in August 2004.

The average price of a home was a seasonally-adjusted £165,967 in August, the Halifax added.

Market activity is improving somewhat. The number of mortgage approvals to fund house purchase continued its upward trend in July, according to the latest Bank of England figures, with the number of loans 26% higher than in November 2004 on a seasonally adjusted basis. Completed sales rose in July following four months of stagnation and there was an increase in new buyer enquiries for the second consecutive month, according to RICS.

The pick-up in monthly house price growth in August seems to be consistent with a pattern established when the Bank of England implemented the first interest rate reductions during the two previous periods of rate cuts since 1997. On both occasions, there was an up-tick in house prices in the month that the interest rate cut occurred; this proved to be a temporary phenomenon.

Martin Ellis, Halifax chief economist, said, "The ongoing growth of the UK economy, robust earnings growth and historically high levels of employment all underpin the housing market. The slowdown in economic growth in 2005 and the high level of house prices in relation to average earnings will, however, continue to curb housing demand and should prevent a renewed surge in house prices."

"The easing in economic growth over the past year to a level that is currently below the UK's long-term average rate of growth, together with a ratio of house price to average earnings that remains historically high (at 5.46) despite a decline over the past few months, is expected to curb housing demand and therefore prevent a renewed surge in house prices. Overall, we expect both house price growth and activity levels to be broadly stable over the remainder of 2005."