Bubble fears as house prices jump most in four years

House prices stage biggest monthly jump in four years, adding to worries of a bubble

The general agreement is that next year will bring more of the same for homeowners. “It will be another good year for property prices,” says Doug Shephard of home.co.uk. “Increased confidence will no doubt produce extraordinary price rises. Regional disparities that exist will continue to play out, and may well be exaggerated further by the Government’s blanket implementation of Help to Buy.” Savills agrees that 2014 will see a continued increase in prices, with Greater London catching up with prime central London. It expects the commutable area around the capital to increase by five and six per cent, with central London rising three per cent. The rest of England and Wales will see a three-four per cent increase, with Scotland lagging behind at one per cent.

House prices have staged their biggest monthly jump in four years, adding to concerns that a new bubble could develop this year.

The average cost of a home rose by 1.4pc in December, the biggest monthly jump since August 2009. This brought the year-on-year increase to 8.4pc.

“If demand continues to run ahead of supply in the quarters ahead, affordability may become stretched,” said Robert Gardner, chief economist at Nationwide, who compiled the house price data.

The figures come a day after the prime minister dismissed fears of a bubble, branding critics of government schemes to support the housing market, such as business secretary Vince Cable, “London-centric”.

The housing market has coped with price rises outstripping wage growth since the middle of the year thanks to ultra-low interest rates, which have kept mortgage repayments in line with long-term trends.

However, the pace of house price growth has more than doubled in the last year, according to Nationwide’s closely watched index. In the first half of the year, monthly house price increases averaged 0.4pc, rising to 1pc in the second half of 2013.

“Part of the reason for the acceleration in house price growth is that the supply side of the market has not kept pace with the upturn in demand, even though buyer numbers remain subdued by historic standards,” said Mr Gardner, adding that in the third quarter of 2013 the number of house sales was 25pc below pre-crisis levels, but the number of new homes built was around 45pc lower.

The headline figure, however, masks stark regional variations. In London, house prices rose 15pc over the year, compared with 1.9pc in the North of England, where the increase is lowest. And while the pace of house price growth is accelerating, the average cost of a home, which according to Nationwide was £175,826 in December, is still 5pc below its pre-crisis peak.

Still, house prices are now rising in all UK regions, a trend which is likely to increase fears of a bubble, according to Howard Archer, chief UK economist at IHS.

“The strong Nationwide for December can only fuel concern that a new housing bubble could really develop in 2014, especially as the strength in house prices is becoming widespread,” he said.

However, Carl Astorri, senior economic advisor to the EY ITEM Club, said fears of a bubble “look – at best – premature”.

“Activity remains well below peak levels on all measures and price increases are also still much lower outside of London and the South East. And while gross lending has picked up nicely over the past six months, there has also been a step up in repayments suggesting that rather than building up more debt, a lot of households are using low interest rates to deleverage.

“The next couple of months’ data will be interesting as the mortgage lending part of Funding for Lending Scheme comes to an end. This was very important in kick-starting the recovery in lending in late-2012 but we suspect that it lessened in importance as time went by and do not expect the removal of the mortgage incentives to have a significant impact on lending levels.”

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