House price rises could move into double-digit territory next month following a strong start to the year.
The latest Nationwide figures show property values rose in January, clocking a 1.2% monthly rise.
At £163,481, the average price of a typical UK property cost 8.6% more than a year earlier in January, up from 5.9% in December.
Despite fears that the end of the stamp duty holiday at the start of 2010 would dampen demand for property, the building society says that annual house price inflation is now likely to move into double-digit territory in February for the first time since May 2007.
This could be helped by consumer confidence about the state of the economy. Earier this week official figures confirmed expectations that the UK exited the recession during the last three months of 2009 – albeit with growth of just 0.1%.
However, Martin Gahbauer, Nationwide's chief economist, says the health of the housing market appears to have disconnected itself from that of the economy.
“Although there may still be some upward revisions to the initial estimates of economic growth, this won’t change the fact that the rebound in the housing market – and particularly house prices – has gone some way beyond the recovery in the overall economy,” he explains.
“This is a reversal of the picture in 2007-2008, when the housing market deteriorated much more quickly and at an earlier point in time than the wider economy.”
But rising inflation, alongside frozen wages, could pose a problem, says Gahabuer: “The aggressive cuts in pay inflation have both upside and downside implications for house prices. 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. “
While he admits this “limits the upside potential for the current recovery in house prices”, on the other hand pay restraint has allowed more people to stay in work. “As a result, relatively few households have been under financial pressure to sell their homes into what remains a relatively weak demand environment,” the economist says.
However, unemployment remains a threat to the housing market recovery remains unemployment, which traditionally lags behind recessions. This lack of job security could hamper any meaningful rise in house prices.
But the outlook for interest rates will remain crucial to house prices.
For some time, many economists have agreed that the Bank of England will keep interest rates unchanged or low until the final quarter of 2010, but possibly longer.
However, with inflation now starting to rise quicker than expected, the validity of this view in being called into question. This could result in interest rates increasing sooner than many might hope – posing a risk of payment shock for homeowners with tracker and standard variable rate mortgages, and creating a new hurdle for first-time buyers.
Ed Stansfield, chief property economist at Capital Economics, argues that rising house prices - alongside the impact of redundancy, pay freezes and more part-time workers - makes it harder for buyers to raise the necessary deposit to purchase property.
"This only increases the chances of a house price reversal later this year," he adds.