House prices are set to accelerate over the coming months because house building is so slow and demand is rising off the back of high employment, wage increases and a longer-than-expected period of ultra-low interest rates.
That is according to Robert Gardner, chief economist at Nationwide, in his bank's house price index for January 2016. Nationwide said the average UK house price grew by 4.4% over the year to £196,829. The month-on-month growth from December was 0.3%.
Employment has risen sharply in recent years and is now at a rate of 74% of working age people, says the ONS. Pay has been rising at around 2% against consumer price inflation of around 0.2%, meaning strong real-terms wage growth. And Mark Carney, governor of the Bank of England, retreated from speculation about an imminent interest rate hike, suggesting it will be delayed while citing volatility in the markets and a worsening global economic outlook.
"As we look ahead, the risks are skewed towards a modest acceleration in house price growth, at least at the national level," Gardner said. "With this trend expected to continue and with interest rates also likely to stay on hold for longer than previously anticipated, the demand for homes is likely to strengthen in the months ahead."
House building is running at around half the level needed to meet demand. A housing supply shortage has driven up prices in recent years, particularly in London and the south east of England. Government figures show housing starts in England in the year to September 2015 were 136,830, down by 0.8% on the 12 months before.
"The concern remains that construction activity will lag behind strengthening demand, putting upward pressure on house prices and eventually reducing affordability," Gardner said. "Indeed, the market is already characterised by a shortage of stock, with the Royal Institute of Chartered Surveyors reporting that the number of properties on estate agents' books remains close to all-time lows."