By ILONA BILLINGTON LONDON—U.K. house prices rose to a five-year high in July as a controversial government support program fuels fears that another house price bubble may be in the making. The Help to Buy program supports buyers by offering cheaper mortgages but doesn't guarantee new housing supply. Help to Buy and increased home loans from banks using the separate Funding for Lending program enable home sellers to ask for higher prices for a short supply of residential property. That potential mismatch between demand and supply has prompted many economists to question the wisdom of the government's support programs, fearing that they may lead to a sharp rise in house prices that can't be sustained over the long run. The rise in house prices is in line with other indicators that suggest the U.K.'s long-awaited economic recovery is gaining momentum. A survey of purchasing managers at construction companies released Friday recorded a surge in activity during July. However, with wage growth remaining below inflation, Britons are still seeing their real incomes falling. The National Institute of Economic and Social Research on Friday said that Britons are being forced to dip into their savings to maintain their living standards. A reliance on rising house prices and spending that outstrips income growth would reprise the weaknesses that contributed to the economy's sharp contraction in the wake of the 2008 financial crisis. Since then, the government and Bank of England have said they want to see a more balanced economy, with growth also driven by exports and increased business investment. But that rebalancing has yet to begin. "House prices are already overvalued, and with many first-time buyers already locked out of the market, it is unlikely they are happy at the prospect of having to take on even more debt to realize their homeownership aspirations," said Matthew Pointon, an economist at Capital Economics. Figures from mortgage lender Nationwide NANW.LN +1.43% showed that U.K. house prices were 3.9% higher from a year earlier. The last time prices rose at a faster annual pace was July 2010, when they grew 6.6%. That means the average price of a residential home in the U.K. was £170,825 ($258,270) in July, the highest since June 2008 when it was £172,415. Nationwide's chief economist, Robert Gardner, said the rise came amid improving buyer confidence due to the recovering economy combined with support from the government's programs. Help to Buy is designed to give first-time buyers of newly built homes an equity loan to help them secure a mortgage at a cheaper rate. It is also being extended to all buyers from January in the form of the government guaranteeing a proportion of the loan, again to help the buyer secure a more affordable mortgage. But while those programs boost demand for homes, it will take some time before supply of new homes increases, particularly in England's crowded southeast. For those who don't own their home, rental costs have been surging, leaving them less to spend on other goods and services. "The supply side of the market remains fairly constrained," Mr. Gardner said. "The fact that rental growth has been consistently outstripping wage growth reinforces the notion that housing more generally remains in relative short supply." The rise in activity in the construction PMI to a more than three-year high suggests that house builders are beginning to respond to increased demand. Sterling rose on the data to a day high of $1.5175 from around $1.5140 before the data, while the euro fell to a day low of £0.8716 from around £0.8730. But that comes after a number of years when new home building was well below the levels needed to meet the needs of a growing population, which means the inadequate supply of property will continue to add upward pressure on house prices. U.K. house builders have reported healthy profits so far this year, with the Help to Buy program named as a driver of increased business. And, builders say they will increase their building activity in response to higher demand. "During the first half of 2013, there has been meaningful improvement in the housing market, with more positive consumer sentiment, a more available and affordable mortgage market, and the presence of government mortgage schemes," said Pete Redfern, chief executive of builder Taylor Wimpey. "We continue to open all new outlets with implementable planning permission." The U.K. economy grew in the first two quarters of this year with consumer spending a key driver of that improvement. But there are concerns that the rise in spending won't be sustained, since it is not driven by rising real incomes. And, new government figures showed the number of individual insolvencies rose in the second quarter from the first, reversing the recent falling trend, as the number of individuals seeking help with their debts rose sharply.

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