House prices surged by 6.5 per cent year-on-year in November, marking the fastest annual increase seen in more than three years, with London seeing particularly strong demand, Nationwide has reported.

Prices have been rising every month for the last year and the latest monthly increase of 0.6 per cent took average UK house values to £174,566.

The annual increase is the strongest seen since July 2010, but Nationwide said that despite the strong pick-up in the housing market, prices are still around six per cent below an all-time high recorded in 2007.

The Bank of England took the first step in putting the brakes on the surging property market on Thursday as it scrapped an initiative that has had a significant part to play in encouraging mortgage lending.

Governor Mark Carney said the Funding for Lending scheme (FLS) stimulus was no longer needed amid rising house prices, and it would instead be focused on helping small business borrowing, which remains muted.

Funding for Lending has offered lenders access to cheap finance on condition that they pass on the benefits to borrowers, and experts said that the Bank’s move could spell the “beginning of the end” for ultra-cheap mortgage deals.

Fears of a looming property bubble have been growing in recent months amid a string of reports suggesting demand in the housing market far outstrips the growth in the supply of homes.

London in particular has seen strong demand this year, and Land Registry figures released on Thursday showed that house prices in London were up by 8.7 per cent year-on-year in October.

But the market remains patchy and prices in the North East have dropped by 3.1 per cent year-on-year, the Land Registry figures showed.

The Government’s new Help to Buy scheme, which offers state-backed mortgages to people with deposits as low as five per cent was launched in October and this is expected to inject further activity into the market among credit-worthy buyers who have particularly struggled to get on the housing ladder or move up it since the financial crisis struck because they have a lack of upfront funds.

Lenders representing around two-thirds of the mortgage market have committed to coming on board the scheme and there are also signs of competition increasing to attract low-deposit borrowers from lenders which are outside the Help to Buy scheme.

Robert Gardner, Nationwide’s chief economist, said that a large part of the uplift in the housing market is also down to improvements in the labour market and the brighter economic outlook, which has helped to bolster sentiment amongst potential buyers.

He also highlighted the impact that low mortgage rates have had on borrowers’ costs.

Mr Gardner said: “Mortgage rates have declined significantly from the already low levels prevailing last year.

“For example, Bank of England data indicates that the interest rate on two-year fixed-rate mortgages for those with a 10 per cent deposit has fallen from 5.6 per cent to 4.4 per cent over the past 12 months.

“For a buyer purchasing the typical UK home over 25 years, this equates to a reduction in monthly payments of around £110 (£1,320 per year) at the current average house price.”

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.