It is over

House prices have risen in two out of three months. The property market is carving out a bottom. The crash is over.

Today's Nationwide data is alarming. Prices posted a 1.2 percent increase. With interest rates at historically unprecedented lows, we could quickly see the house prices accelerate uncontrollably.

There is a curious feature about the UK property market that makes this scenario likely. Even at the height of the bubble, sales volumes were surprisingly low. Since the crash began, volumes have fallen further. It won't take much of an uptick in sales volumes to see some very rapid increases in property price indices.

If property prices recover quickly, it will translate into a dramatic increase in demand. The transmission mechanism will be mortgage equity withdrawal. Again, with interest rates at historical lows, any gain in housing equity will lead to a surge in lending. With the Bank of England generating huge amounts of liquidity, and the government desperate to see banks increase lending volumes, all the conditions are in place for a surge in spending.

However, the supply side of the economy isn't ready. Firms have been cutting back inventories, reducing capacity and firing workers. As such, the UK economy could be best described as about to see a huge positive demand shock coupled with a contractionary supply shock.

In other words, the UK is primed for inflation.