House prices increased by 1.7% in February, according to Nationwide. This was an acceleration from last month’s figure of 0.8% and pushed annual house price growth to 12.6%, the second highest annual growth reading since 2004. This strong growth is fuelled by high demand and a limited stock of homes for sale.

It has been a busy start to the year with rising numbers of sales agreed and mortgage approvals. Sales agreed in February were 31% above the 2017-19 average for the month, according to TwentyCi. Mortgage approvals in January were at their highest level since July 2021 and 12% above the 2017-19 average for the month, according to the Bank of England. So demand remains strong and there is still a large pool of buyers actively looking for new homes.

The stock of homes for sale remains low, however. This low supply relative to demand is driving up prices rather than restraining activity. Completed transaction numbers for January were 7% higher than the 2017-19 average for the month. Buyers are operating with reduced choice and high levels of competition. Meanwhile sellers are preferring to proceed with buyers who are chain free and can transact quickly. This has favoured first time buyers and cash buyers, who both increased their share of the market at the end of 2021.

The supply-demand imbalance will be the main short term driver of house price growth. Affordability will be a longer term constraint. Not only are house price higher, but the wider cost of living is also increasing at a rate exceeding wage growth. CPI inflation reached 5.5% in January, according to the ONS, and is expected to exceed 7% later this year. The war in Ukraine and associated economic uncertainty mean that interest rates may rise more slowly than expected this year. But that would imply lower economic growth that would also hold back household income growth.

The three local authorities with the strongest annual house price growth in November were all outside England. Merthy Tydfill and next door Blaenau Gwent in Wales saw annual growth of 21.2% and 18.3% respectively while Scotland’s Clackmannanshire reached annual growth of 18.3% to November 2021. Local authorities that saw slight house price falls in the year to November 2021 were all in London or the South East, including Southwark at -2.9% and Watford at -1.8%.

The rental market heated up at the end of last year, with 8.3% annual growth across the UK in the year to December 2021, according to Zoopla. London saw the strongest rental growth, at 10.3%, making up for the rental falls seen across the capital in late 2020/early 2021. Wales and the South West have performed particularly strongly, up 9.8% and 9.5% respectively, with rental growth consistent throughout the pandemic.

Rental growth started to decelerate across some parts of the country in Q4 2021, including in East of England and the South West. Here rental growth may have peaked. Meanwhile in London, the East Midlands and the North East rental growth continued to accelerate.