Commenting on the latest Halifax monthly house price index Martin Ellis, chief economist said: “UK house prices fell by 1% in December, but it remains too early to conclude that this indicates a genuine slowdown in the housing market. Overall, prices in the final quarter of 2006 were 4.2% higher than in the previous quarter, marking the strongest quarterly rise since Q2 2004.

“Continued economic growth, rising employment and an ongoing lack of supply will continue to drive up house prices over the coming months. Higher interest rates, greater pressure on household finances and subdued real earnings growth will, however, constrain housing demand. We now expect house prices to increase by 4% in 2007.”

Halifax says that house prices increased in all regions during the fourth quarter. The biggest price rises were in Northern Ireland (15.9%), Greater London (6.6%) and Wales (5.1%). The smallest increase was in the North (0.9%).

Halifax say that the housing market is underpinned by a healthy economy with the latest ONS figures confirming that gross domestic product (GDP) increased by 0.7% for the fourth consecutive quarter in Q3 2006, slightly above the long-term average rate of growth. Household spending growth, however, slowed to 0.4% in Q3 from 0.9% in Q2. Real household disposable income growth also eased, rising by 0.2% in Q3 following a 1.0% increase in Q2.

The number of people in employment continues to rise with a 216,000 increase over the past year to a record 29m in the three months to October, according to the ONS. The number of people in full-time employment, however, fell by 93,000 between the three months to July and the following quarter, suggesting a possible weakening in labour market conditions.