According to Hometrack’s latest index, residential property prices increased by +0.1% in England and Wales in August, which is the first monthly rise since July 2007, leaving the annual rate of decline at -6.7%.

Hometrack believes prices were buoyed by a lack of supply in London and the south-east and did not reflect a broader improvement in the housing market. Prices increased in just 11% of the postcode districts covered by the survey and were static in the remaining 89%, according to the index.

In London, average prices rose by +0.3% over August on the back of dwindling supply of quality homes for sale and rising demand. According to Hometrack, over the last four months the London housing market has seen a -2.6% fall in the number of homes for sale compared to a +34% increase in demand. In the south east, there has been an even larger -5% decrease in supply over the same period but in all other regions of the country, supply has risen and this has limited upward pressure on rents.

Richard Donnell, Hometrack’s director of research, said: “ While average house prices are down by -12% over the last two years, some of the fundamental obstacles to a sustainable housing market recovery still remain. Mortgage availability continues to be an issue for first time buyers who require large deposits to access the market, while unemployment levels - set to rise further - will continue to impact on buyer confidence and suppress demand.

“There will continue to be activity in the less mortgage reliant parts of the market but a fully functioning housing market requires first time buyers and activity across a broader spectrum of would-be purchasers than we have at present.

“The key short-term risks to the market are either a sudden reversal in buyer sentiment or a marked increase in the number of properties coming to the market for sale. Both of which will have the effect of driving down prices.”