Property values are rising at their fastest rate for three years and first-time buyers are at a six-year high, new figures reveal, creating a “virtuous circle” which has given banks and building societies more freedom to lend at the current historically low interest rates.

The result is a “contagious” confidence in the housing market, which will have a knock-on effect for the wider economy, according to industry experts.

The latest evidence of Britain’s economic recovery comes days after forecasts for the country’s annual economic growth were doubled from 0.8 to 1.5%.

The Halifax’s latest monthly index recorded an annual rise of 5.4%, taking the price of the average home up from £160,292 to £170,231, the fastest rate of growth since 2010.

Meanwhile figures compiled by LSL Property Services’ First Time Buyer Monitor showed 26,100 first-time buyers took out loans in July, the highest number for six years and a 45% rise on the same month last year.

David Newnes, director at LSL, said: “Mortgages are much more affordable for first-time buyers compared to last year, which has opened the door to thousands of would-be buyers who were shut out of the market.

“Economic confidence is returning, nudging many more buyers in the direction of property, and nudging lenders to offer more loans to buyers with smaller deposits. The uptick in confidence, beneficial to both parties, is contagious.”

The recovery in the property market has also eroded negative equity, giving banks greater confidence to lend. Analysis conducted for The Daily Telegraph shows the value of bad mortgages, where borrowers were unable to keep up with repayments, has fallen 40% since the peak of the financial crisis in 2009.