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UK property prices fell in August and expected to drift lower in coming months

It means that the average price of a home is now 0.4% lower than a year ago, reinforcing the subdued outlook for the property market in general.

The fall has reversed a 0.3% rise in prices in July. The Nationwide said that sluggish demand and only a gradual rise in rise in the supply of available properties has, however, helped to keep property prices stable since last summer.

Chief economist Robert Gardner said that he does not see much change in the market for the rest of the year. ‘Against this backdrop we continue to expect house prices to move sideways, or drift modestly lower over the remainder of 2011, although we recognise that the downside risks have increased,’ he explained.

Bank of England data out on Tuesday also reinforced the gloomy trend in the property market. Although in July lenders approved the highest number of mortgages since May 2010, that was still well below levels seen before the 2008 financial crisis.

He also pointed out that the economic outlook has become more challenging as the UK economy grew by just 0.2% in the second quarter of the year, well below its long term trend rate of around 0.7%.

‘The major risk for the housing market is that weak economic growth could lead to a further deterioration in the labour market. For some time now the residential property market has been moving sideways, as weak demand for homes coexisted with a situation where relatively few homes were coming on to the market. A further fall in employment would be likely to upset the relatively delicate demand supply balance and put downward pressure on prices,’ he said.

‘We continue to expect the UK economic recovery to gradually get back on track in the quarters ahead, which should guard against a significant deterioration in employment. Interest rates are now expected to remain on hold until well into 2012, which will provide ongoing support for domestic spending,’ explained Gardner.

‘This is a significant shift from just a few months ago, when financial markets pointed to rates rising before the end of the summer,’ he added.

But Paul Hunt, managing director of Phoebus Software, pointed out that with 9% of market share Nationwide’s sample size is currently only 4,000. ‘A drop in prices in August of 0.6% looks pretty dramatic on paper, but the subdued state of the mortgage market makes it difficult to draw firm conclusions from Nationwide’s data at the moment,’ he explained.

‘What’s more, areas where house price growth is currently fastest are being driven primarily by cash buyers, which don’t factor into Nationwide’s numbers. The reality is probably less gloomy than these figures suggest. The improving affordability of finance will improve lenders’ confidence in the UK’s mortgage borrowers, which should stimulate more lending as the year goes on,’ he added.

Indeed, all the latest indices from property agents and consultants indicate that prices in some parts of the country, most notably London, are rising.