Average residential values increased by 0.4% over August, bringing house price growth over the first eight months of 2006 to 3.9%, according to the latest monthly housing market survey by Hometrack.

However, Richard Donnell, Hometrack’s director of research, said, "Whilst the recent rise in interest rates has yet to impact on the market surveys, the sensitivity of the housing market to interest rates means that the London-inspired mini boom of the last eight months is likely to run out of steam over the autumn."

	Jun-06	Jul-06	Aug-06
National average monthly price change	+0.6%	+0.6%	+0.4%
12 month price change	+2.4%	+3.2%	+3.9%
% postcode districts with price increase over month	42.3%	32.4%	30.1%
Average price	£165,500	£166,500	£167,200

The north-south divide in house price growth continued over August. Average residential values in the capital grew by 0.9% over August with above average growth in the South West (0.5%) and the South East (0.4%). In contrast, house prices were static in two regions and up by just 0.1% in three others.

Richard Donnell commented: "The divergence in house price growth is largely a result of affordability and supply-side factors."

"A lack of housing for sale is certainly playing a major role in sustaining the scale of growth in London with agent’s property listings falling over the last quarter. In contrast, the supply of housing for sale has continued to see above average growth in the regions where price rises are low."

Compounding these trends, the Hometrack survey also highlights longer sales periods in the lower growth regions as well as buyers having to accept slightly larger than average discounts on asking prices.

The survey, which tracks residential values across the whole market rather than just areas where transactions are taking place, found that price rises were limited to 30% of the country over August, compared to price rises across 42% of the market in June 2006. This explains the slowdown in the rate of growth over the month compared to June and July.

"The recent rise in interest rates, and talk of further rate rises, is set to have a clear impact on market sentiment and levels of market activity. The result will be less upward pressure on house prices over the autumn and slower house price growth," added Donnell.

Whether headline house prices rise by 4% or 6% over 2006 is largely down to the scale of growth across the London market over the next few months. The recent rate of house price growth across the capital is unsustainable over the medium term as affordability levels are rapidly becoming stretched once again. Interest rate rises will only compound this process. Indeed, there are signs that buyers are starting to test pricing levels with agents reporting a slight decline in the proportion of the asking price that is being achieved.

The under-performance in house price growth across the regions away from southern England is set to continue in the short term as the un-winding of stretched affordability levels continues to run its course in the wake of the major boom in prices between 2000 and late 2004.