Annual house price growth fell for the second consecutive month to 8.7% in June and is likely to continue to drop as measures announced in the emergency Budget hit finances, Nationwide says.
Figures published by the building society suggest that, after hitting double digit growth of 10.5% in April, annual house price inflation dropped to 9.8% in May and fell a further 1.1% this month.
House prices have risen a cumulative 3% over the first half of the year, with the average reaching £170,111 in June.
Monthly house price growth remains broadly stable, increasing just 0.1% in June following a 0.5% rise in May this year. Meanwhile, the quarter on quarter rate of change also showed a marginal change from 1.7% to 1.8%.
Martin Gahbauer, chief economist at Nationwide, says: "Barring a significant pick-up in house prices over the next few months, the annual rate of inflation should continue to drift lower, in light of the very strong price increases recorded during the summer of 2009.
"Recent indicators point to an increase in the supply of property coming to the market for sale, perhaps in response to the abolition of Home Information Packs in the opening days of the new coalition Government.
"With the level of demand remaining broadly stable, this would in part help to explain the recent slowdown observed in the rate of house price inflation."
Gahbauer says the immediate increase of CGT from 18% to 28% for higher rate taxpayers had prevented people from selling early. This had created supply distortions in the market and put downward pressure on house prices.
Yet, he adds: "Looking beyond the short-term, the spending cuts and tax increases in the Budget will clearly put a squeeze on household disposable incomes, which are undoubtedly an important driver of house prices.
"Given the already elevated level of the house price to earnings ratio, this limits the scope for property values to maintain the very strong upward momentum that we have seen over the last year."
However, he highlights the increase in fiscal consolidation meant interest rates are likely to stay lower than they otherwise would have done, providing some offsetting support to households and mortgage affordability.
Gahbauer says: "An improvement in the public finances raises confidence in interest rate stability, it could even attract more buyers into the housing market over time.
"Provided the economy does not suffer a relapse into recession, the net impact of the Budget on the housing market and house prices should be relatively neutral. This is consistent with the relative stability seen in the housing market during the last major fiscal consolidation in the mid-1990s."
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