House prices rose in December at their fastest annual rate in two years, figures from the Nationwide Building Society showed yesterday.
The society's latest snapshot of the housing sector found that higher borrowing costs have done little to cool the market this year.
The Nationwide house price index showed a 1.2 per cent monthly rise, against a 1.4 per cent jump in November, taking the annual increase up to 10.5 per cent.
That was the first double digit annual growth since February last year and the strongest rate of growth since December 2004 when prices were 12.7 per cent higher on a year earlier, the mortgage lender said.
Short sterling interest rate futures extended recent losses yesterday as traders bet that the Bank of England would raise borrowing costs by at least a further quarter-point next year.
"The housing market clearly remains strong and double-digit inflation is something the Bank will be concerned about," said George Buckley, chief UK economist at Deutsche Bank.
The average price of a house rose to £173,746 in December as prices rose by the equivalent of £45 every day this year - three and a half times faster than last year.
"There are still few signs that the rate of house price growth will moderate in the very short term," said Fionnuala Earley, Nationwide group economist.
"The stock to sales ratio - a good leading indicator of house prices - has continued to increase, suggesting a few more months of firm price growth."
Nationwide said it expected house price growth of between five and eight per cent next year, revising an earlier projection for seven per cent. The recent acceleration in the cost of property may raise concern among policymakers that prices are starting to rise too quickly, posing an upside risk to both consumption and inflation.
There is also the chance of a sharp downward correction if confidence in the market should wane.
"Until now the strengthening housing market has not been a big feature of Monetary Policy Committee discussions on interest rates," Ms Earley said.
"But the latest set of minutes clearly identify this as an upside risk."
Money markets and many analysts expect the BoE to raise interest rates to 51.4 per cent in the coming months after November's rise to five per cent as policymakers seek to tame above-target inflation.
Nationwide expects higher borrowing costs, coupled with a lack of affordability for first-time buyers, to drag on the market eventually, resulting in a slower rate of house price growth in the second half of next year.
Mr Buckley agreed, saying: "It takes time for higher interest rates to filter through into the housing market and we expect to see some softening in 2007."
Global Insight economist Howard Archer said higher interest rates, higher prices and "muted" real income growth would act to "squeeze buyers out of the market and curb house price rises" in the coming months.
A separate report yesterday revealed that the average price paid by first-time homebuyers has reached more than £150,000.
Getting on the bottom rung of the ladder cost first-timers an average of £151,565 this year, 11 per cent more than in 2005, the Halifax said.
In London, the average price is more than £250,000 means that first-time buyers are now having to pay three per cent stamp duty for the first time.