House prices rose 1.2% in December bringing the annual rate into double digits again at 10.5%, Nationwide has said.

The Building society also said stable interest rates and supply constraints will underpin the market in 2007 with house prices set to increase by between 5% and 8% this year.

Commenting on the figures Fionnuala Earley, Nationwide's group economist, said: “Both housing market and weather forecasters were surprised by the warm climate this year. The temperate weather is likely to have played only a minor role, but the housing market clearly warmed up during the year.”

“House prices increased three and a half times faster than last year and returned to double digits for the first time since February 2005.”

The annual growth figure rose to 10.5% in December and this was “way above the widespread expectation this time last year that annual house price growth would be in low single digits,” Ms Earley said.

The price of a typical house increased by the equivalent of £45 per day in 2006 - three and a half times faster than the £12.50 per day in 2005 - bringing the price of a typical house up to £173,746.

But double-digit rise could pose a risk to interest rates

Ms Earley said continued growth in house prices could add weight to those calling for further interest rate rises in the new year. “Until now the strengthening housing market has not been a big feature of Monetary Policy Committee discussions on interest rates, but the latest set of minutes clearly identify this as an upside risk,” she noted.

However, Ms Earley predicted that interest rates had peaked at 5% there being little chance of any swift change of the MPC’s views on house price numbers alone. Other factors such as slack in the labour market and a relatively weak consumer confidence should keep a lid on wage inflation, she noted.

“Evidence from estate agents continues to show that supply conditions are tight with fewer sellers coming to market. 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,” Ms Earley said.

However, Nationwide expect worsening affordability and recent interest rate hikes to affect the levels of activity in the market in the coming months. This will feed into a slower rate of house price growth in the second half of next year.