The housing market has had its strongest start to the year since 2005, according to an index.
Annual house price growth increased to 11.2% in January 2022, accelerating from 10.4% in December 2021, Nationwide Building Society said.
But it said it is likely that the property market will slow this year.
Reduced housing affordability is likely to dampen market activity and house price growth, as people’s household budgets are also squeezed by the wider surge in living costs, it warned.
Robert Gardner, Nationwide’s chief economist, said: “Annual house price growth accelerated to 11.2% in January, the strongest pace since June last year, and the strongest start to the year for 17 years.
“Prices rose by 0.8% month on month, after taking account of seasonal effects, the sixth consecutive monthly increase.”
Across the UK, the average house price in January was £255,556.
Mr Gardner added: “While the outlook remains uncertain, it is likely that the housing market will slow this year.
“House price growth has outstripped earnings growth by a wide margin since the pandemic struck and, as a result, housing affordability has become less favourable.
“For example, a 10% deposit on a typical first-time buyer home is now equivalent to 56% of total gross annual earnings, a record high.
“Similarly, a typical mortgage payment as a share of take-home pay is now above the long-run average, despite mortgage rates remaining close to all-time lows.
“Reduced affordability is likely to exert a dampening impact on market activity and house price growth, especially since household finances are also coming under pressure from sharp increases in the cost of living.
“Consumer price inflation reached 5.4% in December, its fastest pace since 1992.
“This is more than double the Bank of England’s 2% target, and inflation is set to rise further in the coming months as the energy price cap is increased.
“This rapid rise in inflation has been an important factor denting consumer confidence in recent months, especially how people see their own personal financial situation evolving, although as yet, this has done little to dent housing market activity.
“High inflation and growing confidence that the Omicron variant will not derail the wider economic recovery has led to increased expectations that policymakers will increase interest rates further in the months ahead.
“This will further reduce housing affordability if it feeds through to higher mortgage rates, although to date a significant proportion of the rise in longer term interest rates seen in recent months has been absorbed by lenders.”
Martin Beck, chief economic adviser to the EY Item Club, said: “A robust start to the year for house price growth probably won’t prove a taste of things to come.
“Notably, the stamp duty holiday, which supported housing demand and prices last year, is now in the past. To the extent the tax holiday brought forward purchases, its after-effects may drag on housing market activity in the near term.
“Meanwhile, the prospect of a series of interest rate rises by the Bank of England in 2022, starting with an expected hike in this week’s meeting, will translate into higher mortgage rates.
“And cost of living pressures faced by households from rising inflation and taxes mean fewer people will be able to afford to borrow the necessary amount they need to buy at higher mortgage rates.”
Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, said house prices could be boosted if households are willing to deploy excess savings they accumulated during the pandemic.
She added: “But house price growth has struggled during periods of high inflation, due to the resulting hit to real incomes. Indeed, we expect households’ real disposable income to fall by around 1.5% this year as inflation surges and taxes rise.”
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: “Even as mortgage rates edge higher, they are still competitively priced, which should give buyers confidence to take the plunge, even in the face of higher living costs.”
Lucy Pendleton, from estate agent James Pendleton, said: “As supply improves, it will have a sobering effect on prices.”
Nicky Stevenson, managing director at estate agent group Fine & Country, said: “While monetary policy will tighten in 2022, this is unlikely to have a significant dampening effect on the housing market any time soon, with most agents around the country still unable to find enough homes to meet demand.”
Tom Bill, head of UK residential research at Knight Frank, said: “The high level of market valuations requested by prospective sellers in January indicates that supply will pick up as more owners decide now is the time to act.
“A number of prospective sellers had hesitated due to the distortive effect of a stamp duty holiday and a global pandemic.”
Related: UK house prices reach record high as cost-of-living crisis bites
