The number of people applying for a mortgage in the US is up 25pc on last year as would-be home buyers attracted by low interest rates and a less risky economic environment return to the market.

The Mortgage Bankers Association’s (MBA) US mortgage market index rose by 5.6pc to 527 in the week ending August 14.

It marks the third-consecutive weekly increase, and comes as interest rates slid to a five-week low, with the average for a 30-year fixed mortgage falling from 5.38pc to 5.15pc.

Buyers are also being attracted by the government’s $8,000 (£4,850) tax credit for first-time buyers – part of President Obama’s $787bn stimulus plan – and the significant fall in the price of property in many areas.

“Probably the biggest driving factor for home purchasing right now is price. During the housing boom, a lot of first-time home buyers were squeezed out of the market, but now property values have come down enough where they can afford it,” said Brad Geisen, chief executive of property website foreclosure.com.

Such activity is vital if the US housing market – which triggered the slump in the economy – is to recover.

The number of people refinancing mortgages on existing homes also increased, up 6.9pc to 1982.5 in the same week. All the MBA’s indices were started in March 1990 at a base reading of 100.

The positive data comes after figures from the Commerce Department on Tuesday showed that construction of single-family homes to be at its highest level since October 2008, while an earlier survey showed sentiment in the home building industry to be at 12 month highs.

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