Sept. 14 (Bloomberg) -- An index of U.K. house prices rose to its highest level in more than two years in August as an interest-rate increase failed to dent demand for homes in Europe's second-largest economy, the Royal Institution of Chartered Surveyors said in a report.

A survey of real-estate agents and land surveyors showed those reporting higher home values outnumbered those showing declines by 35 percentage points, the highest since May 2004, the London-based RICS said today. The index, adjusted for seasonal swings, rose a revised 30 points in July.

Britons' appetite for homes is undiminished after an Aug. 3 interest-rate increase to 4.75 percent as economic growth accelerates and employment rises. Investors are expecting the Bank of England will raise the benchmark rate again before the end of the year to quell inflation.

``Price rises are being driven by a combination of would-be buyers entering into the market and a standstill in new property supply,'' the RICS said. ``Expectations for price rises over the next three months are close to this year's high point, and surveyors are anticipating a strong autumn selling season.''

Most reports since the Aug. 3 increase have shown a pickup in the $6.8 trillion housing market. Prices increased 1 percent in August, top U.K. mortgage lender HBOS Plc said Sept 7. Nationwide, the third-biggest mortgage lender, said Aug. 31 values rose 0.8 percent.

Scotland Leads

Home values rose the most in Scotland, followed by the capital and the south east, supported by increased confidence in the financial sector after market turbulence in May, RICS said. Prices also increased in the north, north west, north east and Wales.

Buyer enquiries rose for a 15th months in August, to the highest level since September, 2003, and newly agreed sales rose 14 percent in the year, the report showed.

Rising values and interest rates could eventually put off buyers with outstanding debt now at a record 1.24 trillion pounds ($2.33 trillion).

``Would-be buyers have been encouraged by a strong economic performance, but additional rises in interest rates before the end of the year could deter buyers as more pressure builds on personal finances,'' said Ian Perry, a spokesman for RICS, in a statement.

Investors are speculating that borrowing costs will rise later this year. The implied rate on the December futures contract was 5.20 percent at 5:33 p.m. yesterday in London. The contract settles to the three-month London inter-bank offered rate for the pound, which has averaged about 15 basis points more than the central bank's benchmark rate for the past decade.

The rate on the December contract has risen from 5 percent at the start of August amid mounting evidence the U.K. economy is gaining momentum. Unemployment dropped the most in more than a year in August and wage growth accelerated, the statistics office said yesterday. The nation's inflation rate rose to match a nine-year high of 2.5 percent in August.

To contact the reporter on this story: Laura Humble in London at lhumble@bloomberg.net

Last Updated: September 13, 2006 19:18 EDT