House price growth returned to double digits this month, but the underlying demand is weakening, said Nationwide today.

Prices rose by a steady 0.7% in February, pushing the annual rate of house price growth back into double digits to 10.2%.

The Bank of England spared homeowners a second consecutive rate rise in February, but its latest forecasts suggest that one more rise could still be on the cards. While the three recent rate rises now seem to be starting to take their toll on the market, not all indicators are cooling just yet, said the lender.

Buyer interest and mortgage demand are waning, but the supply of properties coming onto the market remains low. This lack of supply will mean that house price inflation will remain firm for a while longer, before gradually easing.

The price of a typical house now stands at £174,706. This is more than £16,000 higher than this time last year and the equivalent of a rise of more than £40 per day.

Another rate hike is not yet a done deal

Fionnuala Earley, Nationwide's Chief Economist said: “The Inflation Report and MPC Minutes did not give as much clarity on the future direction of interest rates as we had hoped. This is perhaps unsurprising given the continued split of opinion among MPC members and the highly uncertain inflation outlook.”

“Overall the Bank’s inflation forecast was relatively balanced. While the Inflation Report analysis showed that building in another quarter point rise in rates would bring inflation to its 2% target at the critical two year horizon, it also showed an undershoot both before and after.”

“The case for another rate increase is not therefore cut and dried and weaker inflation, retail spending and business activity data since the forecasts were finalised will have reduced the need for hasty action. The latest MPC minutes suggested that while the Committee has a hawkish bias it is firmly in ‘wait and see’ mode, and while the risks are significantly on the upside, another hike in rates is not yet a done deal.”

Supply issues are keeping an upward pressure on prices as property sales have continued to rise, while the number of properties placed on the market has been falling.

However, demand indicators suggest that the tightness in the market will soon begin to ease. Mortgage approvals for house purchase recorded their largest monthly fall since the early 1990s and were down from 128,000 in November to 113,000 in December. In addition, estate agents have now recorded two successive months of falling buyer enquiries after 18 months of solid gains.

The buy-to–let sector, which provided an important boost to the market in 2006, remains very firm and will continue to support the market in the short term, Nationwide predicts.

However, the buy-to-let market is not immune to rate rises and by the second half of 2007, Nationwide expect to see a more pronounced slowdown in the annual rate of house price growth and expect this to dampen new demand somewhat by putting further pressure on rental yields.