A woman walks past a new residential property development in London

Home prices in the UK have increased in March at the quickest monthly pace in about three years, with London leading the price hikes fuelled by scarce supply and high demand.

The latest Hometrack housing survey revealed that house prices increased 0.3 percent in March, the highest growth since March 2010.

Meanwhile, London witnessed the highest increase since February 2010, with home prices rising 0.7 percent from the previous month, indicating the growing divide between the capital's property market and the rest of England and Wales. Being a safe haven for investments, London's property market has always attracted great interest from overseas buyers.

By region, only the North East had lower house prices compared to January and February. House prices increased across 23.9 percent of the country in March, with 60 percent of London postcodes experiencing a price increase. Across the rest of England and Wales, prices rose in 20 percent of postcodes.

"A lack of housing for sale underpins the boost to prices," Hometrack Director Richard Donnell said in a statement.

"Low growth in the number of new homes coming to the market, rising demand at a seasonally strong time of the year, and a jump in sales agreed has led to depletion in the number of homes for sale which in turn has reinforced scarcity and price rises."

While the demand for houses rose by 19 percent in the last two months, the supply of homes for sale has grown by just 13 percent. Supply was up just 3.5 percent in the six-month period.

The increase in demand was supported by the government's Funding for Lending Scheme (FLS), Hometrack said. The scheme launched by the Bank of England in August last year aims at encouraging lending by mortgage and loan providers.

Looking ahead, the FLS and the recent budget initiatives aimed at both funding and housing are expected to provide more support to property prices. Further, the weakening pound and concerns over Cyprus and the eurozone are expected to increase the flow of international funds into London.

"While scarcity of homes, support for lending and new housing will all act as a support to pricing levels, the problems of affordability and deposit levels still remain serious impediments to a full blown housing market recovery," Donnell added.