"The three-month on three-month rate of change – usually a smoother indicator of the near term trend – dipped slightly from 2.3% in December to 2.1% in January, but this primarily reflects the smaller price increases recorded in November and December.
"At £163,481, the average price of a typical UK property cost 8.6% more than a year earlier in January, up from 5.9% in December. Unless there is a fall in property values in February, annual house price inflation is likely to move into double-digit territory next month for the first time since May 2007.
"Over the course of the last month, there were several important pieces of economic news with relevance for the housing market.
"The news that the UK economy finally emerged from recession in the fourth quarter of 2009 was in many ways a mixed bag. Although it is clearly encouraging that economic activity is no longer falling, it remains a long way below the pre-recession level and is not yet growing convincingly. Although there may still be some upward revisions to the initial estimates of economic growth, this won’t change the fact that the rebound in the housing market – and particularly house prices – has gone some way beyond the recovery in the overall economy. This is a reversal of the picture in 2007-2008, when the housing market deteriorated much more quickly and at an earlier point in time than the wider economy.
"Despite the economy’s unconvincing exit from recession, the labour market figures have continued to see welcome improvement. Unemployment fell in November for the first time since February 2008 and December saw a second consecutive decline in the number of jobless benefit claimants. These improvements in the headline jobless figures, however, hide some of the other adjustments that have been taking place in the labour market, most notably with regard to average pay. Over the course of 2009, UK average earnings growth has fallen to the lowest levels on record, as many employers have opted to spread their cost reduction measures over a wider segment of the workforce by freezing or reducing pay.
"The aggressive cuts in pay inflation have both upside and downside implications for house prices. With pay inflation near zero or even negative, every additional increase in house prices worsens housing affordability, particularly since interest rates are very unlikely to fall any further. All else being equal, this limits the upside potential for the current recovery in house prices. On the other hand, pay restraint has allowed more people to stay in work and continue to service their mortgages at the current low rates of interest. As a result, relatively few households have been under financial pressure to sell their homes into what remains a relatively weak demand environment."
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