House prices jump 1.2 per cent in January - N'wide

According to the index, the three-month on three-month rate of change, usually a smoother indicator of the near-term trend, dipped slightly from 2.3 per cent in December to 2.1 per cent in January, but reflected the smaller price increases recorded in November and December.

The average price of a property in the UK is now £163,481, an 8.6 per cent increase on January 2009, and a 5.9 per cent in December last year.

Martin Gahbauer, chief economist for Nationwide, said although there may still be some upward revisions to the initial estimates of economic growth, this would not change the fact that the rebound in the housing market, and particularly house prices, had gone some way beyond the recovery in the overall economy.

But he said the aggressive cuts in pay inflation would have both upside and downside implications for house prices

Mr Gahbauer said: "With pay inflation near zero or even negative, every additional increase in house prices worsens housing affordability, particularly since interest rates are very unlikely to fall any further. All else being equal, this limits the upside potential for the current recovery in house prices."

With negative real earnings growth, the future path of interest rates becomes even more critical for the housing market, Mr Gahbauer said.

He said: "The consensus is interest rates will remain unchanged until the final quarter of 2010 and possibly longer, as spare capacity created by the recession bears down on inflation over time. But some survey evidence suggests spare capacity is less than in the previous recession, then higher interest rates may be required sooner than is widely assumed."

Paul Hunt, managing director of financial systems provider Phoebus, said the Nationwide data demonstrated that prices are being kept artificially high, driven by lack of supply in the market.

He said: "People are not putting their property on the market because low interest rates are acting as a disincentive."

Meera Patel, senior analyst for Bristol-based IFA Hargreaves Lansdown, said the house price rise was only a short-term trend.

She said: "Unemployment has not stabilised, and there are still too many negative signs in the economy. House prices may bottom, but not until the end of this year."