Property prices are set to increase by 1.2 per cent this month, pushing up the annual rate of inflation to 10.5 per cent, according to a market survey.

Mortgage lender Nationwide estimates that the average home in the UK now costs £173,746, up from £172,185 last month, after an unseasonably strong end to the year.

The provider also expects stable interest rates in the New Year, which will underpin a sparsely-supplied house market and result in property price rises in the region of five to eight per cent.

But affordability issues will continue to worsen for first-time buyers, warns Nationwide's group economist Fionnuala Earley.

"The rate of house price growth in 2007 is expected to be relatively robust at between five per cent and eight per cent," she said. "Momentum gathered in 2006 will flow into the early part of 2007 and this will be supported by a buoyant economy, stable interest rates and a continuing shortage of housing supply.

"We can therefore expect to see a few months of double-digit annual house price inflation in the first half of the year. However, increasingly poor affordability, the impact of higher mortgage rates and the likelihood that fewer parents will be willing or able to help their children out will cause the rate of house price growth to move back into single digits in the latter part of the year," she concluded.

The mortgage expert does believe, however, that interest rates have peaked at five per cent and does not expect the Monetary Policy Committee to raise the base rate in 2007.