According to a survey from property market research group Hometrack, house prices increased by just 0.3% in January, as demand dropped off during the Christmas and New Year break. 

Hometrack said it expected positive news on the UK economy and jobs to support improved market sentiment in the coming months.

However, the group warned that prices could rise further over the next few months unless supply keeps up with escalating demand, which is being driven by government incentives for first time buyers such as ‘Help to Buy’.

Concern has grown that housing schemes to help get people on the property ladder could lead to a price bubble unless housebuilders build more homes.

The supply of homes for sale fell by 6.6% in January and supply has shrunk in the last five months in a row, falling by 17%.

Hometrack said: “If sellers remain slow or reluctant to enter the market, in expectation of further price gains, then the pressure on prices will build rapidly once again.”

This follows warnings from Ernst & Young’s special report on housing that the London housing market is beginning to show signs of ‘bubble-like conditions’, while the rest of the UK has returned to normality.

According to the report, income multiples are now back to pre-financial crisis levels in London, with homeowners taking on ever larger mortgages.

Caution on the part of borrowers and lenders should prevent a serious problem developing, but the report warned that policy makers should be monitoring this trend closely and be prepared to take action if this key indicator of market stability continues to escalate.

Andrew Goodwin, senior economic adviser to the EY ITEM Club, said: “House prices across most of the country remain well below their pre-crisis peaks and there seems little danger of a bubble developing. But London, which is suffering from a combination of strong demand and a lack of supply, is increasingly giving us cause for concern.

“Some have suggested that Help to Buy should be altered or cancelled but this is a red herring. The scheme has only a very limited impact on the capital and withdrawing it could risk choking off the recovery in housing transactions across the rest of the UK without solving any of London’s issues. The Financial Policy Committee should instead be looking to limit income multiples.”