Figures show house prices rose 1.2% in January » Housing » 24dash.com

House prices started the year on a strong footing, rising by 1.2% during January, figures showed today.

The latest increase, which was more than double the 0.5% rise seen in December, left the average UK home costing £163,481, a level last seen in August 2008.

The rise also pushed annual house price growth up to 8.6%, compared with 5.9% in December, according to Nationwide Building Society.

The group said that, unless there was a fall in house prices during February, annual house price inflation was likely to move into double digits next month for the first time since May 2007.

Martin Gahbauer, Nationwide's chief economist, said: "House prices strengthened their upward momentum at the start of 2010, increasing by a seasonally adjusted 1.2% month on month in January."

Some commentators had expressed concern that house prices would fall during the early part of this year, as the market slowed down after people rushed to complete transactions of lower value properties before the Government's stamp duty holiday finished at the end of December.

Nationwide had also reported that the monthly rate at which prices were rising had either fallen or stayed the same during the past four months, dropping from a rise of 1.4% in August to one of only 0.5% in December.

But January's strong increase suggests the current imbalance between supply and demand is continuing to offer support to house prices.

Figures from the British Bankers' Association, released earlier this week, also showed that the number of new mortgages approved for house purchase rose to its highest level since September 2007 during December.

However, despite the current buoyancy, many commentators expect house prices to end 2010 at around the same level they started it, rising during the early part of the year, before falling back again during the second half.

The outlook for the housing market is heavily dependent on how well the economy performs during the coming year.

Nationwide pointed out that UK average earnings growth had fallen to its lowest level on record, as employers opted to freeze or cut workers' pay as an alternative to making redundancies.

It said that, while this had helped to prevent a flood of repossessed homes coming on to the market, it did mean that the recent run of price increases had had a bigger impact on affordability.

The group also warned that higher-than-expected inflation may cause the Bank of England's Monetary Policy Committee to start raising interest rates again sooner than previously expected, further impacting affordability and denting demand.

David Smith, senior partner at property consultancy Carter Jonas, said: "The surprisingly strong house price growth in January is primarily due to the major imbalance between supply and demand.

"There is considerable demand in the market but almost zero supply and this, above all, is what is driving prices up."

He added that the shortage of homes on the market meant increasing numbers of properties were going to best and final offers, as buyers competed with each other.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The Nationwide data indicate that house prices started 2010 with some impetus and they look likely to rise further in the near term at least.

"Even so, the suspicion remains that the rises seen since early 2009 cannot be sustained, given a still far from favourable economic environment and still relatively tight credit conditions.

"We believe that a modest relapse in house prices is likely at some point in 2010 and they may well be essentially flat over the year as a whole."