LONDON (Reuters) - British house prices edged lower in May, in line with economists' expectations, but the annual rate of growth rose and a shortage of homes is likely to push prices up further, mortgage lender Halifax said on Thursday.
House prices dropped by 0.1 percent in May compared with a 1.6 percent surge in April.
The year-on-year rate of growth, however, was at its highest since December at 8.6 percent in the three months to May compared with the same months last year, up from an 8.5 percent annual increase for the three months to April.
"The imbalance between supply and demand is likely to continue to push up house prices over the coming months. Looking further ahead, the increasing level of house prices in relation to earnings is expected to dampen house price growth," Halifax economist Martin Ellis said.
The figures contrast with those released on Wednesday by rival mortgage lender Nationwide, which reported the lowest annual increase in house prices in nearly two years, at 4.6 percent.
House prices on both measures were growing at a double-digit rate in the middle of last year, before tighter rules on mortgage lending sapped demand.
But Britain's housing market appears to be recovering momentum. The Bank of England this week reported the biggest jump in the number of mortgages approved by lenders for six years, taking April's total to the highest since early last year.
With wages now outstripping inflation and May's election victory of Prime Minister David Cameron's home-owner friendly Conservative Party, many economists think house prices could rise more strongly than previously thought.
"A recent shortage of properties coming on to the market seems to be exerting increasing upward pressure on house prices," said IHS Global Insight economist Howard Archer.
"Nevertheless, the upside ... is expected to be constrained by more stretched house prices to earnings ratios, tighter checking of prospective mortgage borrowers by lenders and the knowledge that interest rates will eventually start rising."
A Reuters poll on Tuesday showed that on average, economists expect house prices to rise by 6 percent this year and 5 percent in 2016, up sharply from forecasts they made three months ago.