The month-on-month increase in house prices in September suggests that the housing market is putting the very weak mid-year period behind it, according to a client note from Capital Economics.

But underlying rates of house price appreciation are still slowing, and with mortgage demand stagnating, there are few signs of an imminent pick-up.

“The headline CoreLogic house price index fell by 0.1% m/m in September. But house prices tend to be weaker at this time of year, and our own seasonal adjustment of the headline numbers points to a 0.6% m/m increase in underlying house prices,” says Paul Diggle, property economist for Capital Economics. “This was the strongest seasonally-adjusted increase in six months. Indeed, after falling in April and stagnating in May, monthly price gains have accelerated gently over the past four months.”

Diggle says that comparisons over a longer period of time suggest that underlying house price growth is still slowing.

The year-on-year rate hit a two-year low of 5.6% in September, with price growth among non-distressed homes slowing even further to 5.2%.

And during the third quarter as a whole, prices increased by just 2.8% annualized. “That’s in the same ball-park as our forecast for price gains of 4% per annum this year and next,” Diggle says. “The outlook certainly doesn’t look conducive to price growth of much more than that. Earlier rapid gains mean that housing is no longer obviously undervalued – indeed, an increasing number of States are looking on the expensive side. That’s kept home sales relatively subdued at the same time as the inventory of homes for sale has picked up.”

Consistent with this picture, he says, the latest Fed Senior Loan Officer Survey showed that, although lenders are making mortgage credit more available, demand has stagnated. “A net balance of 11% of banks loosened lending standards on prime mortgages in the fourth quarter – the second consecutive loosening in credit conditions. Less encouraging, however, was that after expanding sharply in the third quarter, the demand for mortgage loans was all-but unchanged in the fourth quarter,” he said. “That’s consistent with moderate rates of house price inflation for the foreseeable future.”