Interest rate rises put brakes on house prices in 'orderly slowdown'

The lender said that house prices had risen by less than 0.5% a month in three of the past four months, a sure sign the housing market was slowing in response to a string of rate rises in the past year.

It said the three-monthly pace of increase - a good indicator of the underlying state of the market - had slowed to just 1.6% from 4.5% in March.

Halifax chief economist Martin Ellis said: "While the market remains robust, this provides further evidence that house price inflation has slowed since the beginning of the year.

"The downward trend in house price growth is expected to continue over the remainder of 2007 as the five interest rate rises since last summer have an increasing impact on household spending and housing demand."

He said that high levels of employment and a shortage in the number of properties available for sale would prevent the market slumping. He also predicted that the annual pace of increase would slow sharply as the strong rises of summer and autumn last year drop out of the figures.

Halifax said the level of new buyer interest fell for the eighth successive month in July, marking increasing caution among potential buyers.

House prices have more than tripled in the past decade due to low interest rates, rising employment and pay. Halifax said the average house price in this country is now just a shade under £200,000.

Richard McGuire, analyst at RBC Capital Markets, said that although the housing market may be losing momentum it displayed resilience. But he added: "The orderly nature of this slowdown and the accompanying residual support the housing market promises to afford the consumer, stands to ensure the risk to the Bank's policy rate remains slanted to the upside for a while yet."

Separately, the purchasing managers' monthly survey from the Chartered Institute of Purchasing & Supply and NTC Economics showed unexpected growth and optimism in the service sector last month, suggesting again that higher interest rates and credit market troubles are not damaging the economy. The CIPS index, which covers businesses ranging from hotels to financial services,rose to 57.6 last month from 57.0 in July. Analysts had forecast a drop to 56.5. Above 50 indicates growth.

Sentiment in financial services also remained relatively high, despite recent hedge fund collapses and investment fund bail-outs. Howard Archer at Global Insight, said: "There is little evidence from the service sector survey that the financial market turmoil is currently feeding through to dampen activity, although it is probably premature to expect this."

Analysts said that resilience in the service sector, which accounts for three-quarters of the economy, may renew the case for another interest rate rise this year.