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The underlying pace of house price growth is slowing in the UK, says the building society Halifax, but there is still a fundamental imbalance between high demand and low supply which will keep prices surging higher.
When compared to the previous quarter, the average house price grew by 1.6% in the three months to the end of December, hitting £208,286, according to the Halifax index. Over the year to December 2015, this was a 9.5% growth rate.
"This was the second successive month that this measure has been below 2%, indicating a possible slight softening in the underlying rate of price growth," said Martin Ellis, housing economist at Halifax.
"There remains, however, a substantial gap between demand and supply with the latest figures showing a further decline in the number of properties available for sale. This situation is unlikely to change significantly in the short-term, resulting in continuing upward pressure on prices."
A shortage of housing supply has driven up house prices sharply in recent years, particularly in London and the south east of England. House building is running at around half the rate needed to meet demand with little sign things will change, though the London market, which has fuelled much of the headline rate of house price growth, may be reaching its peak.
Newham, the London borough, saw the fastest house price growth in all the country. Over a year, prices rose by 22%. For London overall the annual growth rate was 12%, said Halifax.
Hansen Lu, a property economist at Capital Economics, said "with house prices already high and growing much faster than wages, we expect price growth to slow markedly during 2016".
"With all of the house price indices rising at a rate of at least 4.5% per year, but wage growth at only 1.9% y/y, house prices are becoming increasingly out of kilter with earnings," Lu said. "And with high prices restraining transactions volumes more and more, we think the market needs to take a breather soon. Consequently, we see house price inflation dropping to 2% by the end of 2016."
In the autumn statement for 2015, Chancellor George Osborne doubled the housing budget to £2bn – having cut it back in the early years of his first term in office during the coalition – as part of the government's efforts to get more homes built. Prime Minister David Cameron said the government will start commissioning new homes directly.
But a skills shortage is holding back the construction sector and new housing starts have fallen. Housing starts in England in the year to September 2015 were 136,830, down by 0.8% on the 12 months before, according to data from the Department for Communities and Local Government (DCLG). A study commissioned by the Local Government Association (LGA) shows there are over 475,000 unbuilt homes with planning permission, and construction work has started on only 52%.