House prices fall in line with expectations

House prices fell for the second consecutive month in August, by 0.9%, the first time prices have dropped for two months in a row since February 2009, according to Nationwide.

The drop follows a 0.5% fall in July, leaving annual house price inflation running at 3.9%. This is a sharp fall from the annual rates of 6.6% in July and 8.7% in June.

At the start of the year, the lender forecast that UK house prices would remain fairly flat this year, hance decreasing property prices in the second half of 2010 are not unexpected.

Hence Nationwide said that the latest correction was "not an unhealthy development".

The average house price across the UK was £166,507 in August compared to £169, 347 in July.

Nationwide's house price index figures for the three-month rate of change showed that property prices have stagnated over the summer with a 0% rate of growth in August down from 1.2% for the three months to July.

Martin Gahbauer, chief economist for Nationwide, said: "This is the first time since February 2009 that house prices have fallen in two consecutive months.

"Unless house prices bounce back strongly in September, the three-month rate of change will turn negative next month."

Gahbauer said that recent market trends are consistent with the change to the supply-demand imbalance that drove up prices for much of 2009.

Increasing numbers of sellers have now returned to the market meaning buyers have greater choice and bargaining power to bring down asking prices.

He added: "There is little evidence of distressed selling, however, with the CML's second quarter figures showing another drop in mortgage arrears and possessions. "

"As such, the current period of price declines is likely to remain relatively modest. Given that the price increases of the last year had got ahead of the recovery in the wider economy, the current correction is not an unhealthy development."

Nationwide's research showed that more borrowers are now on variable rate mortgages.

Between Q4 2008 and Q1 2010, the proportion of mortgage balances on fixed rates fell from 48% to 36%, as fewer borrowers chose to remortgage to a new fixed rate deal as SVRs plummeted.

Gahbauer said: "Borrowers on variable rates have experienced a very large cash flow benefit from the reduction in the Bank of England base rate in late 2008 and early 2009.

"The average rate paid on variable rate mortgage balances across the market was only 2.8% in June, compared to 5.9% in September 2008 and 5.3% for fixed rate balances. The additional cash flow from lower mortgage rates has been instrumental in keeping arrears and possessions relatively low during the recession, helping house prices to stage the rebound seen between early 2009 and the middle of 2010."

However, he warned that an increasing number of households are now exposed to potential future rate increases:

"Should the proportion of variable rate mortgage balances remain high, the impact of base rate increases on monthly repayments, and therefore house prices, may be larger than in the past."

Nevertheless, Gahbauer said that interest rates are likely to remain at their current level until well into 2011 and any increase would be relatively gradual, giving variable rate borrowers the opportunity to switch to fixed rates.