House prices have revived amid signs of fresh optimism, with property shortages set to underpin the market, Britain’s biggest building society has said.

Nationwide said that the value of the average home rose by 0.4 per cent this month after declining by 0.2 per cent in December.

The annual rate of price growth slowed to 12.6 per cent, its lowest rate for three years, with January the sixth successive month of price declines or weak growth.

"It is increasingly a buyers’ market with prospective buyers staying on the sideline until the outlook [for house prices] becomes more certain," Alex Bannister, the Nationwide group economist, said.

However, he added: "With prices having been broadly stable for six months and the market nearing the end of the usual seasonal lull, there are indications that sentiment may be about to turn more positive."

November’s fall in the number of home loans approved for UK house purchases to 77,000, the lowest figure for ten years, may have been a reflection of a shake-up in mortgage regulation rather than of deepening market pessimism.

"We expect activity levels to return to around 90,000-100,000 cases per month in the coming months," Mr Bannister said.

Longer-term, the difficulty of building sufficient homes to meet demand, with the number of households rising by 1 million over the last six years, would support property values.

Levels of protest at Government plans for extra homes meant that it was "not clear" whether the target would be met.

"Consequently, it is likely that house prices (especially in the South East) will remain underpinned by pressure on the housing stock," Mr Bannister said.

Yet with the number of households continuing to be boosted by increased longevity, immigration and the number of Britons living alone, the stock of homes would be insufficient to meet demand by 2010.

"Despite plans to increase the rate of new build over the medium term, the gap between the number of dwellings and the number of households is likely to narrow further, maintaining the upward pressure on house prices," Mr Bannister said.

• Britain has lost its top rank in Europe's house price growth league after becoming the only major country to suffer rises in borrowing costs, the Royal Institution of Chartered Surveyors has said.

  The 12 per cent rise in UK house values last year was equalled by Irish homes and overtaken by homes in Spain and in France, where inflation reached 15.5 per cent.

  The slowdown in UK home growth followed five interest rate rises in eight months while eurozone rates remained at 2.0 per cent.

  RICS added: "As the only country to have experienced significant interest rate rises in 2004, the UK's six-month market slowdown is likely to lower Britain's house price inflation rate even further."

  Greece's property market was the worst performing of the 15 monitored by RICS, recording a 4 per cent decline in prices. Markets in Austria and western Germany were flat.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive