House prices in the U.K. show no signs of slowing down and are predicted to rise up to 6 percent over the next 12 months, according to Nationwide data and economists.
U.K. house prices grew 4.5 percent in December from the same period last year, according to the building society's latest monthly house price index, picking up pace from a 3.7 percent annual gain seen in November. It marked the largest monthly increase since April. In December, the average U.K. house price was £196,999 ($292,048), according to the same survey.
In London, house price growth increased to a rate of 12.2 percent in the fourth quarter of 2015, Nationwide said, continuing a trend of rapid growth in the capital.
Looking into next year, robust growth in the U.K.'s property market shows no signs of abating despite the prospect of the Bank of England raising interest rates.
Nationwide expects U.K. house prices to rise by 3 to 6 percent over the next twelve months but said there were risks that could increase prices further, reducing affordability for many struggling to get on the housing ladder.
"As we look ahead to 2016, the risks are skewed towards a modest acceleration in house price growth, at least at the national level, despite the likelihood of interest rate increases from the middle of next year," Nationwide's Chief Economist Robert Gardner said in the latest price index report.
"Further healthy gains in employment and rising wages are likely to bolster buyer sentiment, while borrowing costs are expected to rise only gradually. However, the main concern is that construction activity will lag behind strengthening demand, putting upward pressure on house prices and eventually reducing affordability."
A tale of two halves
While the U.K. housing market has continued to perform well it is a tale of two halves, with London and the southeast of England outpacing the rest of the country in terms of house price rises by a wide margin.
While the average house price in London was £456,229 in the fourth quarter of 2015, in the north of England, the average house price was £124,167, Nationwide's index showed. In Scotland the average price was £139,801 in the same period.
Gardner added that the divergence was likely to continue in 2016. "Prices in the south of England are now well above their pre-crisis levels while they remain below in Scotland, Wales and large parts of the north of England. With affordability metrics in the capital stretched by historic standards, another year of above-average price gains appears unlikely."
Nationwide's forecasts for a near 6 percent house price gain in the U.K. were corroborated elsewhere. Howard Archer, chief U.K. and European economist at IHS Global Insight said on Wednesday that the analysis firm expected house prices to rise by a similar margin during 2016 "amid healthy buyer interest (supported by largely decent fundamentals) and a shortage of properties."
"Nevertheless, the upside for house prices is expected to be constrained by more stretched house prices to earnings ratios, tighter checking of prospective mortgage borrowers by lenders and the probability that interest rates will start rising gradually during 2016," Archer added, although he noted that higher interest rates were "unlikely to have a major dampening impact on the housing market."
Is there a bubble?
While the housing market – and associated mortgage lending - has accompanied an economic recovery in the U.K., there are fears of a housing bubble. This is where prices rise dramatically due to demand and speculation amid a limited supply, only to later crash when interest rates rise and demand decreases.
Aware of the dangers posed by an over-heating housing market, the U.K.'s Finance Minister George Osborne announced measures to increase taxes on those who buy second or buy-to-let homes. He also announced measures aimed at boosting house-building, but analyst Archer noted that "it will take time before the measures have a significant impact on housing supply."
"That is assuming that the measures prove successful. Furthermore, the shortage of properties is acute and so sustained, that major progress needs to be made on the house building front to really eat into this problem (of lack of housing supply," he added.
- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow CNBC International on Twitter and Facebook.