The average house is now worth £272,000 – 9.8 per cent more than a year ago.
The annual rise recorded by the Office for National Statistics equates to £2,221 a month throughout 2014.
The good news for homeowners comes as inflation fell to 0.3 per cent last month and other figures show wages have risen by four per cent year on year.
Housing specialist Dominik Lipnicki said: “Property has proved to be a better investment than almost any other and people have seen owning their own home has made them £73 richer a day.
“Demand is far bigger than supply, particularly in the South-east, and until that is reversed the trend will continue.
“For many, their property may well be their pension.”
For many, their property may well be their pension
Dominik Lipnicki, housing specialist
Insiders predict prices will soar a further five per cent this year taking the average house price to an all-time peak of £285,600.
Gross mortgage lending is set to hit a record £225billion this year and online estate agency Rightmove said it saw a record 100 million visits to its website this month despite the fact that the start of the year is usually the quietest time for house buying.
It predicts prices will leap ahead in the coming months as stamp duty reforms and record low mortgage rates tempt more people to the market.
Experts calculate at least 500,000 homes need to be built in the UK each year to satisfy demand.
But the number of new houses being built in England last year, although the highest for six years, was only 122,590.
And of these new-builds, only 109,370 were completed by the end of the year, the lowest total since 2010.
The price of a typical house is just fractionally below the all-time high of £274,000 recorded last August, the ONS said.
The year-on-year rises, which equate to a national average of 9.8 per cent when adjusted for variations in the types of properties sold, have come in all areas of the country. Wales, the West Midlands, the East, South-east and South-west all reached record highs in December.
Wales and the North-west of England saw a four per cent year-on-year increase and the annual rise in London was 13.3 per cent.
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Economist Howard Archer said: “We expect support for housing market activity to come from the stamp duty reform, very low mortgage rates, elevated consumer confidence, a pick?up in earnings growth and rising employment.
“It currently looks very possible the Bank of England will hold off from raising interest rates until 2016.”
There were 1,222,600 home sales in 2014 according to HM Revenue & Customs, 874,600 of them to buyers with mortgages but 28 per cent for cash.
The surge in prices has meant getting on the property ladder has become harder for first-time buyers.
The average price paid by a first-timer in December was £208,000, 9.5 per cent more than they would have paid a year earlier, said the ONS.
Nonetheless, 311,500 first-time buyer home loans collectively worth £45billion were made in 2014, the Council of Mortgage Lenders said yesterday.
This is the highest number of first-time mortgages since 2007, when 359,900 loans were handed out.
The average age for a first-time buyer was 30.
Expert Stephen Smith, of Legal & General, said: “Increases above the rate of inflation stop those on lower incomes and first-time buyers from being able to afford a house.
“To ease the pressure on house prices we need to build more homes. Demand still outstrips supply in the UK.”