LONDON (Bloomberg) — UK house prices advanced this month at the fastest pace since December, boosting the chances of an interest-rate increase by the Bank of England next week.The average cost of a home rose 1.1 percent from May to $184,070 pounds ($368,000), according to figures from Nationwide Building Society, the biggest UK mortgage lender. The median estimate of 13 economists in a Bloomberg survey was for a gain of 0.5 percent. The annual pace of house price growth accelerated to 11.1 percent, the fastest since January 2005.

Today's report suggests four rate increases to a six-year high have yet to cool Britain's housing market, which is defined by a shortage of supply. Bank of England Governor Mervyn King voted in favour of higher borrowing costs this month when the bank decided to keep the rate unchanged in a 5-4 vote, bolstering speculation of an increase on July 5.

"The bounce-back in June is a bit stronger than expected," said Fionnuala Earley, chief economist at Nationwide, in an interview. "It looks like the bank will bring forward the decision to increase interest rates, and increases the risk that rates get to 6 percent this year."

Investors raised bets on higher borrowing costs after yesterday's report. The pound rose as high as $2.0044 and traded at $2.0018 at 11.30 a.m. in London. The implied rate on the December futures contract gained two basis points to 6.24 percent.

The contract settles to the three-month London inter-bank offered rate for the pound, which averaged about 15 basis points more than the central bank benchmark for the past decade.

House prices in England and Wales rose 0.7 percent in May from April, the Land Registry, a government agency that records all property transactions, reported on its web-site yesterday. The average value of a home stood at $180,594 ($362,000), 8.9 percent more than a year earlier.

House prices in London, home to one in eight of the UK population, gained 1 percent from April to $335,658, the Land Registry said. A 15 percent increase from a year earlier was led by Kensington and Chelsea, a central London district favoured by bankers, hedge fund managers and film stars, where prices surged 23 percent.

The number of properties sold for more than $1 million increased by almost a third in England and Wales in the year through March 2007, the Land Registry said.

"The balance of risks to inflation remains to the upside," King said yesterday in a testimony to the UK Parliament's Treasury Select Committee. The pace of house-price inflation doesn't appear to be slowing, King said.

Gordon Brown, who became prime minister on Wednesday, has promised to focus on making housing more affordable as a shortage of homes helps drive up prices. On May 13, Brown pledged to spur construction of five new environmentally friendly cities as part of a plan to supply 200,000 new homes a year, up from an annual average of 148,000 between 1989 and 2005.

As Chancellor of the Exchequer for the past decade, Brown has overseen the UK's longest stretch of uninterrupted economic growth since World War II. The number of jobs in the workforce reached a record 31 million at the end of last year.

An influx of more than half a million eastern European workers since the European Union's expansion in 2004 has lifted the U.K. population above 60 million, adding to demand for housing.

"We're not building enough houses for people to live in," Earley said. "We also have a strong economy, the labour market has been strong, and there have been strong amounts of immigration."

UK banks approved the most loans for home purchase in six months in May, the British Bankers' Association said this week. That also suggests rate increases to date haven't been enough to curb demand for housing amid a shortage of properties.

There are some signs the housing market may start cooling. Prices rose at the slowest pace in a year in May, the Royal Institution of Chartered Surveyors said June 14.

"Higher interest rates will add to the squeeze on demand in the housing market in the short-term, helping to reduce the rate of growth in the second half of this year," said Nationwide's Earley.