House prices rose by three per cent in the first half of 2010, according to the latest figures from the Nationwide Building Society.

According to the figures the annual rate of house price inflation fell from 9.8 per cent in May to 8.7 per cent in June.

The monthly change in house prices was an increase of 0.1 per cent in June, down from a rise of 0.5 per cent in May. The average price of a house rose from £169,162 in May to £170,111 in June.

Martin Gahbauer, Chief Economist at Nationwide, said, "The month of June presented a picture of broad stability for the housing market. The price of a typical UK property rose by a seasonally adjusted 0.1% month-on-month (m/m), following a 0.5% increase in May. The smoother 3 month on 3 month rate of change rose marginally from 1.7% to 1.8%. By

contrast, the annual rate of house price inflation dropped for the second consecutive month from

9.8% to 8.7%, reflective of the fact that house prices were increasing at a faster pace this time last year.

"Barring a significant pick-up in house prices over the next few months, the annual rate of inflation should continue to drift lower, in light of the very strong price increases recorded during the summer of 2009. Over the first half of 2010, UK house prices have risen by a cumulative 3.0%."

"Recent indicators point to an increase in the supply of property coming to the market for sale, perhaps in response to the abolition of HIPs in the opening days of the new coalition government. With the level of demand remaining broadly stable, this would in part help to explain the recent slowdown observed in the rate of house price inflation.

"The emergency Budget announced on 22 June marked the beginning of a period of fiscal austerity. The most directly relevant policy change for the housing market was the decision to raise the capital gains tax (CGT) rate for higher earners from 18% to 28%. An increase in CGT for second home owners had already been flagged well in advance of the Budget. However, there were fears that the rate could be brought into line with higher rates of income tax, which could have seen it rise to 40% or even 50%. The actual increase has therefore turned

out to be relatively modest.

"More important in terms of the short-term impact on the housing market was the decision to

implement the change with immediate effect. Had there been a delay in implementation, it is quite likely that many second home owners would have chosen to sell early in advance of the tax increase. This could have shifted the supply-demand balance quite markedly in favour of buyers and put downward pressure on house prices. As a result of the immediate implementation, however, there are unlikely to be any significant supply distortions in the near term resulting from the tax change.

"Looking beyond the short-term, the spending cuts and tax increases in the Budget will clearly put a squeeze on household disposable incomes, which are undoubtedly an important driver of house prices. Given the already elevated level of the house price to earnings ratio, this limits the scope for property values to maintain the very strong upward momentum that we have seen over the last year. However, the acceleration of the fiscal consolidation means that interest rates are likely to be lower than they otherwise would have been, which should provide some offsetting support to households and mortgage affordability. To the extent that an improvement in the public finances raises confidence in interest rate stability, it could even attract more buyers into the housing market over time.

"Provided the economy does not suffer a relapse into recession, the net impact of the Budget on the housing market and house prices should be relatively neutral. This is consistent with the relative stability seen in the housing market during the last major fiscal consolidation in the mid-1990s."