The housing market has had its strongest start to the year since 2005 but is likely to slow over 2022, according to Nationwide.
Annual house price growth rose to 11.2% in January, accelerating from 10.4% in December 2021, according to the building society's latest index.
Prices rose by 0.8% month on month, after taking account of seasonal effects, which is the sixth consecutive monthly increase. Across the UK, the average house price in January was £255,556.
However, reduced housing affordability is likely to dampen market activity and house price growth as people’s household budgets are also squeezed by the wider surge in living costs, Nationwide warned.
Robert Gardner, Nationwide’s chief economist, said: “While the outlook remains uncertain, it is likely that the housing market will slow this year.
“House price growth has outstripped earnings growth by a wide margin since the pandemic struck and, as a result, housing affordability has become less favourable."
Mr Gardner pointed out a 10% deposit on a typical first-time buyer home was now equivalent to 56% of total gross annual earnings - a record high.
“Similarly, a typical mortgage payment as a share of take-home pay is now above the long-run average, despite mortgage rates remaining close to all-time lows," he said.
“Reduced affordability is likely to exert a dampening impact on market activity and house price growth, especially since household finances are also coming under pressure from sharp increases in the cost of living.
Consumer price inflation reached 5.4% in December, its fastest pace since 1992, and more than double the Bank of England’s 2% target. Inflation is set to rise further in the coming months as the energy price cap is increased.
Mr Gardner said inflation had been an "important factor" denting consumer confidence in recent months, especially how people see their own personal financial situation evolving.
"As yet, this has done little to dent housing market activity. High inflation and growing confidence that the Omicron variant will not derail the wider economic recovery has led to increased expectations that policymakers will increase interest rates further in the months ahead," he added.
“This will further reduce housing affordability if it feeds through to higher mortgage rates, although to date a significant proportion of the rise in longer term interest rates seen in recent months has been absorbed by lenders.”
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